Spot market prices for liquefied natural gas (LNG) have reached $18 per million BTUs and could go higher this year as supplies of the fuel appear to be softer than many traders had originally thought. LNG production dropped sharply in 2012 and is expected to grow only slightly this year.
Most of the world’s supply of LNG is delivered under long-term contracts, which means that any disruption to energy supplies caused by natural or man-made disasters could push spot prices sharply higher almost instantly.
New production, particularly from gargantuan projects in Australia, will improve supplies, but those projects are still a year or more from becoming reality. And costs are exploding. Exxon Mobil Corp. (NYSE: XOM) recently raised its cost estimate for an LNG project in Papua New Guinea and Chevron Corp. (NYSE: CVX) and Royal Dutch Shell PLC (NYSE: RDS-A) have done the same for their massive projects in Australia.
The higher prices may help offset the billions of dollars cost increases these firms have just committed. But by the second half of this decade, these and other new projects, including at least one in the United States, will be on-line and today’s shortages may turn into tomorrow’s glut.