In a special report on global energy prospects, the Paris-based International Energy Agency (IEA) warns that expectations for a robust liquefied natural gas industry may fall apart due to bad economics and high transportation costs.
Although the agency expects companies to invest $735 billion on the complex industry by 2035, and thereby double the volume of LNG traded from 330 billion cubic metres to 560 bcm, it doubts the industry will able "to deliver all that is expected" due to soaring costs and diminished returns.
"At the root of this uncertainty is the high capital cost of LNG infrastructure, which creates a strong preference among project developers and financiers for mechanisms that lock in, as much as possible, a stable long-term cash flow," warns the report.
The Asian market, which faces the highest natural gas prices in the world, "have made it clear that they seek more advantageous terms for future purchases, as the current situation is leaving their economies with heavy import bills and serious concerns about industrial competitiveness."
Capital costs for LNG projects, particularly those in Australia, are rising and severely pinching the industry.
About two-thirds of all global investment in LNG is now located in Australia. Three LNG projects are completed and seven are under construction.
The nation's aggressive coal gas business, which employs fracking, has created widespread inflationary costs, undermined environmental safeguards, threatened groundwater resources and created a wave of public opposition with slogans like "Australians uniting to protect our land water."
LNG projects in Norway and Papua New Guinea have also run into major cost-over runs.
The report makes no mention of British Columbia's LNG strategy, where the National Energy Board has granted export licenses to nine of 13 proposed projects. To date, investors have not committed due to inflationary concerns, the high cost of shale gas production and dramatic global energy changes such as the proposed Russian natural gas pipeline to China.
In contrast, a few U.S. LNG proposals may be able beat the inflationary cost trend by taking advantage of established infrastructure and ports as well as "access to a large market for engineering and construction services."
The report also notes that the rising cost of building complex liquefaction facilities "also gives reason for caution when estimating the pace at which LNG capacity will expand in the years ahead."
"High cost for liquefaction and cost inflation can easily move projects out of the zone where they deliver returns to investors as well as LNG that meets their buyers' needs."
The report also notes that natural gas, due to a lower energy density, "costs between seven and ten times more to transport than oil or coal."
"The cost of transportation is a much higher share of the cost of the delivered product, which is why most gas is consumed within its region of origin," explains the IEA.
The report concludes that high transportation costs could constrain the globalization of gas markets.
The report also noted that the global economy is spending more money on developing hydrocarbons than it did in 2000 due to the decline of conventional fields and the difficult and capital intensive nature of extreme and unconventional resources such as bitumen and shale gas.
In 2000, companies spent $400 billion chasing hydrocarbons, but by 2013 they were spending nearly $900 billion.
Fossil-fueled economies are also on a collision course with climate change.
Current investment choices are well short of "reaching climate stabilization goals, as today's policies and market signals are not strong enough to switch investment to low-carbon sources and energy efficiency at the necessary scale and speed."
Award-winning journalist Andrew Nikiforuk writes about energy for The Tyee. Find his previous stories here.