US uncertainty unsettles LNG industry

Bill White

Researcher/writer for the Office of the Federal Coordinator

Anxiety is rising in the liquefied natural gas business over the slow rollout of North American LNG export projects. Anxiety about supply. Anxiety about pricing.

The worry was simmering at the big Gastech Conference & Exhibition held March 24-27 in Goyang, South Korea, as LNG buyers and sellers fretted that the world’s constrained supply could last beyond the next few years.

“Despite all the rhetoric and hubris that our industry generated, LNG will be shorter for longer than most people are imagining,” said Martin Houston, a recently retired chief operating officer of the U.K.’s BG Group, a global LNG supplier.

Where once 10 LNG projects worldwide were predicted to get sanctioned for construction in 2013, just one actually did, he said, Yamal LNG in Russia.

“Demand is rising strongly. There are many new markets. ... As an industry, we are failing, year-on-year, to meet the targets we set ourselves,” Houston told some 1,200 conference attendees from across the globe.

LNG demand has been flat for two years, constrained because little new supply has come to market.

Growth for the immediate future likely is under control. New plants starting in Papua New Guinea and Algeria in 2014, and in Australia, Indonesia, Malaysia and Louisiana in the following few years should slake demand that’s busting in China and India and blossoming in such new LNG consumers as Thailand and the Middle East, as well as up-and-comers like Myanmar and the Philippines. Bernstein Research recently estimated supply will grow by over 30 percent in the next three years, according to Platts news service.

Then what.

“We believe that markets are under-estimating demand and over-stating supply,” Bernstein said in its new report. “While buyers may feel they have the upper hand, the market looks tight to us through 2020.”

A couple of years ago, the U.S. and Canadian supply was expected to begin rolling out in force by 2017 or so, right when it would be needed based on demand projections. But U.S. projects are backed up, awaiting government approvals and final investment decisions. And Canadian projects have had trouble locking down customers as buyers wait to see what happens with U.S. projects.

Only one of the 40-plus proposed North America LNG projects (only a handful actually will get built, most say) will have its gas on the market by 2017, the Cheniere Energy project at Sabine Pass, La. Mid-2018 is the best-case scenario for first gas from the next Lower 48 project, and consensus predictions for most Canadian LNG projects now are a chilly “sometime post-2020.”

It’s not only the delayed volumes from North America that are muddying the marketplace.

Many proposed U.S. projects plan to handle LNG priced in a brand-new way: The U.S. Henry Hub market price for natural gas, plus additional gas to run the plant, plus a liquefaction fee, plus shipping costs.

That’s a departure from the Asia standard of discounting LNG slightly below the energy-equivalent crude-oil price. At current prices, Lower 48 LNG would cost Asian buyers far less than oil-indexed LNG. That possible pricing break has the rapt attention of both buyers and sellers, even though Henry Hub pricing history is noted for dramatic highs as well as dramatic lows, presenting a risk to LNG buyers.

Houston, the former BG executive, characterized the Asian buyers’ state of mind this way: Indecision, inertia and indexation anxiety.

Industry in flux

It’s what a business school professor would call a “disruptive innovation” — the big new idea that upsets the old modes of commerce.

Thompson’s firm surveyed financiers, project developers, traders and buyers this winter in London, Houston and Singapore. No one is sure what might happen, or how fast.

That’s a problem for an industry in which it takes many years to authorize and build a new project, Thompson said. It’s also making the people who finance LNG projects edgy by adding another level of risk that they’re not quite sure how to mitigate, he said.

Thompson called North America LNG the century’s third great wave of expansion, after Qatar’s massive build of export plants in the first decade and Australia’s great expansion under way today.

North America is providing new ways of playing in the LNG business, he said. Buyers are finding easy entrée as upstream investors in gas fields. They are negotiating contracts that will add pricing diversity to their global gas purchases. And maybe just as important, many U.S. cargos could have “destination flexibility,” freeing the buyer to divert the LNG to any port that’s needier or higher-priced, a break from the tradition of a seller locking its buyer into long-term commitments to take deliveries only to specified locations.

The key U.S. projects — the ones most likely to proceed — are a different business structure, too, Thompson said.

A traditional LNG project involves development of gas fields, pipelines, a liquefaction plant, storage tanks, a shipping terminal and tankers, as well as regasification terminals to receive the LNG — a coordinated value chain developed in unison.

But for many U.S. export projects, much of this value chain exists already. The project’s core undertaking is just the liquefaction plant, a much smaller investment, and, in part because it’s smaller, one that allows newer kinds of companies into the business than the government and international oil companies that have dominated the business. The LNG plant merely would provide a service to the resource owner — processing, storing and shipping the gas; it would never take ownership of the gas, avoiding the risks of commodity prices.

All of this challenges the norms underpinning existing projects and existing marketers, and how they do business, Thompson said. According to his survey results, the industry is in flux: There’s no consensus on what might happen.

Ten Alaska-sized projects needed

Buyers: I need affordable and reasonable prices. I see possibly lots of supply coming, particularly from a new pricing venue. That will pressure prices down.

Sellers: I need profitability with steady production for a long time. More demand is coming. Price should reflect spiraling costs. The market will be tight if no final investment decisions to build new LNG projects occur or uncertainty persists.

Andrew Walker, vice president for global LNG at BG Group, like many other speakers, blamed the schism on the U.S. slow move to LNG “creating a divergence in buyer and seller views.”

However, Alaa Abujbara, chief operating officer for commercial and shipping at Qatargas, the world’s biggest LNG producer, warned gas buyers about counting too strongly on North American LNG to meet their demand needs.

Like many other forecasters, Abujbara estimates about 150 million metric tons of LNG supply — about 20 billion cubic feet of gas a day — will be needed in 2025 beyond what is currently under construction or approved for construction. That’s about 10 projects the size of the proposed Alaska LNG plant, which is in a preliminary, pre-construction phase of development.

“The 150 million metric tons of LNG are going to be very challenging to bring on stream, and people need to start thinking about it as early as possible,” Abujbara said. U.S. projects have regulatory uncertainty and many have unproven liquefaction companies behind them. Canada would be a new, unproven exporter and its projects face cost pressures, he said.

Hamad Rashid Al Mohannadi, chief executive of RasGas Co., the other major Qatari LNG maker, also cautioned buyers.

U.S. prices remain attractive only if Henry Hub prices remain low and oil prices remain high, and project costs don’t go haywire, he said.

Houston, the former BG Group executive, made a similar point. He noted that the short-lived spike in U.S. gas prices during a February cold snap — averaging over $7 for a week — should remind buyers that marrying into the U.S. market exposes them to possible extreme price volatility. The embodiment of that volatility in this winter’s price spikes, he said, is prolonging the stall that’s keeping new projects from moving ahead.

At $7 per million Btu for the feed gas, Lower 48 LNG would lose much of its allure in Asia, costing around $14 delivered to Japan, about the same as oil-indexed LNG prices when crude oil costs about $100 a barrel.

Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/us-export-uncertainty-unsettles-global-lng-industry