Wednesday, January 21, 2004

LNG Safety and Supply
Unfortunately the explosion at the oil and gas facilities at Skikda, Algeria on Monday provides a current example of some of the possibilities I raised yesterday. There has been no suggestion of sabotage or terrorism, with a number of reports blaming poor maintenance, but the result is still a significant disruption in the LNG market and possibly in the gas markets of the EU. Algeria's state hydrocarbon company, Sonatrach, accounts for roughly 20% of Europe's gas imports from Skikda and a larger compex at Bethioua. It also supplies high quality diesel and jet fuel from the refinery adjacent to the Skikda LNG complex.

The scale of the impact will depend on how many of the LNG "trains", or parallel processing plants, have been damaged, how long they will be out of action, and on how quickly the undamaged units can be back on stream. This incident could limit natural gas supplies in the Mediterranean for months and push up European gas prices for some time.

It will be interesting to see how the market responds to this accident, and whether it helps foster the creation of a real spot market for LNG, which has been traded on very different terms from crude oil. Because of the massive invesments required on both sides, suppliers and customers typically enter into contracts for 20 years or more. And unlike oil, with its extremely liquid spot market, LNG cargoes typically only traded outside of these long-term contracts on a sporadic basis. That has been changing gradually, particularly as the US has increased its imports, but it is a far cry from the responsiveness of the oil market to a comparable supply problem, as we saw when Venezuelan production was shut in last year during last year's strike.

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