ROD DEAN'S 2006 REVIEW

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E & C Hydrocarbon Review - The Global view from Europe. Looking back on 2006 & ahead to 2007.

Chevron and Shell are holding back on construction projects from Australia to Nigeria, which could force up LNG prices for years to come. The primary reason is that the cost of building LNG plants has tripled in six years, according to Bechtel Group, the biggest US contractor.

The Gorgon project on Barrow Island, off northwest Australia, projected to cost as much as $19.2bn, is among the major ventures that have been delayed. None of the world's biggest energy companies approved developments last year.

Natural gas prices are three times higher than during the 1990s and consumption of the fuel will outpace the 1.6% annual gain in energy demand for the next 25 years, according to the Paris-based International Energy Agency.

"Costs are going up and they're going up far faster than anybody expected," said Andy Flower, a UK-based consultant to the LNG industry and a former BP executive. He forecasts that the world LNG shortage will last until at least 2011. Well he keeps popping up and making a living in that most difficult of games (forecasting) - well I have been following his words of wisdom for 15 years now and he seems to survive.

Natural gas in New York has soared from an average $US2 per million British thermal units in the 1990s because consumption increased oil costs rose and domestic supplies diminished. US gas production peaked in 1973, and demand since then has held steady, increasing the need for imports.

Gas may become more important than oil in the next 50 years because crude supplies are running out faster, according to the International Energy Agency. Global oil and natural gas reserves were about the same at the end of 2005, equal to 1.2 trillion barrels of crude, according to data compiled by BP.

Oil reserves are being burned almost twice as quickly as gas. LNG sales rose about 11% last year to 157 million tonnes, according to Wood Mackenzie Consultants in Edinburgh. It could jump about 66% to 261 million tonnes in 2010 and another 87%to 488 million tonnes by 2020, the group said.

Record LNG prices would not fall for "years to come", said Ari Soemarno, president of Indonesia's state energy company, Pertamina, until 2005 the world's largest LNG exporter. Prices under multi-year contracts, excluding freight and insurance, range as high as about $US10 per million British thermal units in Asia, assuming $US60 a barrel for oil, part of LNG price formulas.

The cost of building liquefaction plants has risen to as much as $US600m ($770m) for each million tonnes of annual production from about $US200m in 2000, according to San Francisco-based Bechtel.

Former Federal Reserve Chairman Alan Greenspan in June testified in Congress that LNG is "very important for the US, for our national security" and has argued for increased investment. "We have not picked up as quickly as we need" to increase imports, he told the Senate Foreign Relations Committee in Washington about energy security and economic risk. He declined to comment for this story.

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