LNG
Growth Overseas, But U.S. Market Softens

The liquefied natural gas business in the U.S. currently "is not doing very well," and the market overall is expected to remain tight, according to James M. Kendall, director of the Natural Gas Division of the U.S. Energy Information Association. This is despite the reality that the U.S. has only about a decade of gas production years remaining (ratio of natural gas reserves to production) compared to 59 years average for the world and 217 years in the Mideast. But there are many factors that will influence what will happen in the future.

To help attendees understand the business and what's happening in various parts of the world, Kendall explained where the expenses lie and where activity is occurring. A quarter of the cost of the business is in exploration, while 53% is in the liquefaction process, 14% is in shipping and 8% is in receiving.

Liquefaction plants-the place where gas is made ready to transport to other countries-typically run between $5 to $8 billion, costs that remain high because the plants are in remote areas, they must deal with difficult safety issues, large amounts of cryogenic materials are used, and equipment and utilities costs run high. By the year 2012, the number of LNG exporting countries is expected to increase to 18, but one-third of those new entrants are in developing countries such as Angola, Iran, and Venezuela, which carry higher degrees of risk.

Meanwhile, the world is "in the midst of a shipping boom," Kendall said, as ship's capacities increase through better technology. The number of ships being made is growing faster than the number of liquefaction plants, he said.

The regasification business-turning the transported liquids back into gas-is booming, also growing faster than liquefaction efforts. But by far the greatest amount of activity is in Japan and Korea, Kendall said, while only 12% of the business is in the U.S. and Mexico. Still, there are currently 8 LNG terminals in the U.S. and Canada, another 5 are proposed or under construction, and 12 have been approved by the Federal Energy Regulatory Commission.

KENDALL'S FORECAST: After reaching 771 bcf (billion cubic feet) last year, LNG imports in the U.S. for this year (390 bcf) and next year (480 bcf) will be the lowest levels since 2002. Imports into the U.S. from Canada will decline at the same time exports to Mexico may increase. Still, in today's natural gas industry, "tiny changes in supply/demand can mean a big difference in prices," Kendall said.

PETROCHEMICALS
Beginning a Decline

The value chain of the petrochemical industry is driven more by the end users-which are consumers-than by the feedstocks that go into making the products. Because of this, the industry has not yet seen decreases of the size that businesses in some other oil- and gas-dependent industries have seen, according to Mark Eramo, executive vice president of Olefins and Derivatives at CMAI Global.

That's partly because of the dynamics of the chain: Petrochemicals make up only 10% of the products that come from crude oil and only 25% of those that come from natural gas. Instead of being price drivers, "petrochemicals are energy price takers," he added.

Still, "at some point, we will start to feel it [price increases combined with inflation] in the downstream markets, and we've certainly seen it in the investment end," he said.

To follow the market, many in the industry focus on ethylene, which is growing at a rate of about 4% to 5% per year and was sitting at 115 million metric tons in 2007. Ethylene is used in products such as pipes, containers, polystyrene-the kinds of nondurable products most people relate to "plastics." Because of the need for these products: "Regardless of how the economy is doing, the market will do well as long as global needs increase," he explained.

Overall, the petrochemical industry is seeing a low to moderate slowdown brought on partly by the "paper vs. plastic" debate. The supply side, however, is seeing an aggressive rate cut, especially in North America. Capacity is "ample and expanding," but the industry is at the beginning of a cyclic downturn, Eramo said.

"We are at the end of a beneficial cycle for petrochemicals and now on the downhill curve," he said. "Producers are fighting a losing battle on healthy margins."

The key to long-term viability for the industry will be low cost production of the goods because most of the industry is based on market costs. The greatest challenge going forward will be energy costs because countries where prices are set by the government (Saudi Arabia, for example) have a built-in advantage. The Mideast and Asia dominate the current wave of new capacity with roughly half of new additions driven by incentives for industrial development, while North America and Europe have limited to no capacity, Eramo said.

ERAMO'S FORECAST: Major petrochemical markets are transitioning from peak to trough cycle conditions meaning profits will be lower and prices will fall. Oversupply due to accelerated new capacity will dominate near-market conditions. The trough could be severe if demand growth is impacted by high prices and slowing economic growth.

HYDROCARBON REFINING
A Different Face to Come

In the hydrocarbon industry, high prices are not necessarily good for refineries because they hurt margins significantly, according to Mark Peters, publisher of Hydrocarbon Processing and Construction Boxscore. As a result, the last year has been a tough one-much harder than 18 months to two years ago. Because the recent spikes in crude oil were unexpected and rapid, the hydrocarbon processing industry hasn't been able to keep up with the pace in terms of raising their own prices, he pointed out.

"Essentially what we are seeing worldwide is the end of the era of cheap energy sources," he said. The nation needs to find as many alternate sources of fuel as it can, but most are workable only on a smaller level, not at the power grid scale, he said.