Steve Johnson, Waterborne's presidentSteve Johnson

Global LNG production increased 12% from November to December 2009, but more than twice that volume of new supply is set to hit the market this year. That is the conclusion of a recent report by Houston-based Waterborne Energy, Inc., which closely follows the LNG and LPG markets.

"The LNG industry is currently moving into the largest global LNG production bubble the world has ever seen," said Steve Johnson, Waterborne's president. In a recent edition of its Waterborne Global LNG Production Tracker proprietary reporting tool, the company predicted that global LNG production will grow a staggering 26% year-on-year in 2010. The increase stems primarily from the large number of liquefaction trains commissioned in 2009 that will reach a full calendar year of production. Adding to global capacity will be new project start-ups in Qatar, Peru, and Yemen.

'The LNG industry is currently moving into the largest global LNG production bubble the world has ever seen.'

As the graph below shows, global LNG production has been on a steady upswing since mid-2009. The growth curve became steeper last November as plants commissioned earlier in the year began to operate at capacity. Waterborne expects this trend to continue through 2010 -- albeit at a more gradual rate -- with global monthly production staying above the 900-Bcf mark until mid-late summer, when it could surpass 1,000 Bcf.

GRAPH: 2008-2010 MONTHLY GLOBAL LNG PRODUCTION

Since last April, five additional liquefaction trains have reached or exceeded production capacity and are processing nearly 1.6 trillion cubic feet (tcf) of natural gas. These trains producing at or above capacity include Sakhalin Train 1 in Russia (230 bcf), Qatargas II Train 4 (374 bcf), Sakhalin Train 2 (230 bcf), RasGas Train 3 in Qatar (374 bcf), and Qatargas II Train 5 (374 bcf). Three additional projects began ramping up production in 2009 and should add 522 bcf of liquefaction capacity this year. They include Tangguh trains 1 and 2 in Indonesia (182 bcf each) and Yemen LNG Train 1 (158 bcf). Five other LNG trains representing nearly 1.5 tcf of processing capacity are either starting up (in the case of RasGas 3 Train 7, with 374 Bcf of capacity) or are on track to enter the start-up phase this year. The four remaining trains include Yemen LNG Train 2 (158 bcf), Peru Camisea Train 1 (201 bcf), Qatargas III Train 6 (374 bcf), and Qatargas IV Train 7 (374 bcf). The chart below provides a breakdown of the 3.8 tcf in new global liquefaction capacity for 2009-2010.

GRAPH: 2009-2010 NEW LIQUEFACTION CAPACITY

The chart below compares projected global LNG production for 2010 with total liquefaction volumes from recent years.

GRAPH: GLOBAL ANNUAL LNG PRODUCTION

The additional liquefaction capacity is going online during a period of lackluster demand for LNG. Markets that have traditionally been heavily reliant on imports, including Europe and Japan, are approaching the limits of how much LNG they can physically accept. Two factors, solid demand growth in South Korea and China and an unusually cold winter in the Northern Hemisphere, have prevented surplus LNG volumes from becoming even larger. As liquefaction ramps up dramatically and the seasons change, however, ever-increasing supplies of LNG are destined to end up in the only market that can practically receive them: the U.S.

"The growth in 2009 really didn't occur or translate into cargoes on the water until very late in the year," said Johnson. "From this point forward the U.S. should resume its role as the global summer sump for excess volumes, much the way it was prior to 2008. The difference will be the scale of imports will be much greater."

'From this point forward the U.S. should resume its role as the global summer sump for excess volumes, much the way it was prior to 2008. The difference will be the scale of imports will be much greater.'

The situation becomes more interesting when one factors in the strong growth in U.S. natural gas production from emerging shale plays, which are increasingly able to supply traditionally LNG-reliant regions such as the Northeast as pipeline companies expand their gathering and transmission networks. "We are seeing these plays affect domestic pricing which acts as a deterrent when it comes to LNG imports, especially when you have capacity in Europe and Asia at higher netback values," said Johnson.

"The LNG will have to move somewhere, and unless global producers begin to shut-in production, the U.S. is going to get a good slug," Johnson concluded.