Weather impact on natural gas and LNG industry.

11. December, 2016 News No comments
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There are several factors which can impact the LNG industry, however, there is one which is completely independent from human actions. The nature of liquefied natural gas extraction and transport make weather conditions a serious factor which could affect the seasonality of LNG supply and largely affect the prices.

Due to the nature of LNG liquefaction process it is largely dependent on temperature variations. Output is much higher at cooler temperatures because the procedure requires the gas to be cooled down to approximately −260 °F. All the complexity of this process results in strong dependency of the LNG output on ambient temperature variations. Even as little as 1 ºC change can potentially impact the output – we read form Wood Mackenzie’s report. (Wood Mackenzie, 2016)

Most of the liquefaction plants were built in hot and stable temperature areas, hence, the LNG output has been consistent as well. However, recent projects show that there will be a significant shift towards more temperature unstable regions. “Around 200 mmtpa of capacity is currently under construction or proposed in areas with more than 10°C annual temperature variation, including the US Gulf Coast and Australia.” – says Lucy Cullen, Wood Mackenzie’s Senior Research Analyst.

The chart provided by Wood Mackenzie, perfectly shows how the LNG plants are distributed per temperature variations:

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Moreover, weather conditions may affect the LNG pricing in other ways. It is worth mentioning a case study from years 2005 and 2006 when hurricanes were responsible of a 4% plunge in US natural gas production. Such events should not be a significant problem during summer periods when the demand for natural gas is usually low. Problem may arise when increased demand during winter periods clashes with severe weather conditions. This may result in a situation when supply cannot meet demand on time, therefore a price increase is most likely. The difficulty of predicting the consequences of weather change means storage gas supplies may not always cushion the unexpected turbulences.

It is worth to point out that extremely cold conditions can affect the machinery that is used at drilling and extraction sites. Below certain temperatures additional heating equipment is required to protect hydraulics from freezing. Snowfall may slow down most of the machine movements making the production less effective and more expensive than under normal conditions. Therefore, it may lead to decreased supply and higher gas prices.

On the other hand, as natural gas has significant share in electricity production, it can be affected by abnormalities during summer season as well. If warmer than normal temperatures occur, then electricity demand for air cooling increases. This may lead to natural gas and LNG prices increase as well.

To sum up, natural gas and LNG industry must be considered as largely dependent on weather conditions, therefore, increased seasonality of gas supply is most likely imminent.

by Alex Zakrzewski

References:

https://www.woodmac.com/analysis/lng-seasonality

http://www.eia.gov/energyexplained/index.cfm?page=natural_gas_factors_affecting_prices

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