Big changes for LNG business, study says

Larry Persily

Petroleum News Government Affairs Editor

Worldwide competition among liquefied natural gas suppliers looking for buyers is changing the way companies — and countries — do business, says Wood Mackenzie Ltd., a global oil and gas consulting firm.

Downstream marketing and distribution companies are moving up the chain to take a stake in proposed LNG supply projects, while upstream suppliers are expanding down the chain and adding regasification and marketing to their traditional role as explorers and producers.

In addition to companies taking on new roles in putting together winning LNG deals, project financing will be harder to obtain as investors look for ventures backed by developers’ strong corporate balance sheets instead of only the riskier project revenue, according to a May 6 report from Wood Mackenzie.

Meanwhile, producer countries are competing with each other by lowering their take at the supply source, said the report, “Falling Short? The Growing Challenge to Supply the North American Natural Gas Market,” which looks at North America gas production and demand, supply costs, and LNG’s growing role in the marketplace.

LNG project developers will meet the challenge of serving U.S. customers with a mix of gas from several potential suppliers in Norway, Africa, Trinidad and Tobago, the Middle East, Southeast Asia, Australia and Russia. Uncontracted, recoverable gas reserves worldwide total more than 4,200 trillion cubic feet, the report said.

That uncontracted estimate of 4,200 tcf compares with BP PLC’s June 2003 estimate of 5,500 tcf in proven reserves worldwide. All that gas chasing after supply contracts is helping to change the LNG business.

“Governments with large natural gas reserves are slowly switching their focus toward the monetization of these resources,” the report said.

“Increasingly, we are seeing a number of countries implementing more gas-friendly terms for investors to ensure that stranded gas resources are monetized. … However, these friendly terms will not be giveaways, but will be tailored to accurately assess the value of the gas in global markets.

Companies pit countries against each other

The Alaska Natural Gas Development Authority paid $25,000 for the LNG chapter of the multi-client study as it continues to research the feasibility of a state-owned project to move North Slope gas to market via tankers instead of a pipeline.

The old days are fading when producers focused on production “and rarely kept ownership of the LNG beyond the discharge port,” the study said. “The upstream oil and gas majors are moving further downstream the value chain, and new entrants such as Sempra are planning to move further upstream the value chain.”

Sempra Energy, a San Diego-based natural gas marketing and electrical power generating company, has teamed up with Royal Dutch/Shell Group to develop an LNG receiving terminal on Mexico’s Baja Peninsula to serve the Southern California market. It would be the first time either company has taken a stake in a U.S. LNG receiving terminal. The companies say the plant will go online in 2007, with a capacity to handle 1 billion cubic feet per day.

Wood Mackenzie sees the Baja project as an example of one of three emerging models for the new regasification terminals needed in North America:

• A joint venture, where two or more companies get together to form a complete value chain with production, liquefaction, shipping, regasification and marketing.

• An integrated model, where one company has a presence in all aspects of the value chain.

• The more traditional merchant plant, where the owner depends on third parties to use the regas terminal and pay the tolls.

Regardless of which model is used, financing will be an issue, the report said. Those developers looking to build regas terminals with non- or limited-recourse debt will have a hard time finding investors willing to lend at attractive rates.

“Current availability of … project-finance debt for LNG and pipeline projects is constrained by an overall reduction in the number of financiers with appetite for project risk and project lending,” the report said.

“One of several contributing causes to the tightening of available project finance supply, and the corresponding shift away from a borrower-friendly environment, has been the collapse of the merchant energy sector and the resulting bankruptcies and restructurings.

“Project financing is also more costly, complicated and time consuming to raise than corporate debt.”

Investors’ reliance on a developer’s balance sheet, assets and credit rating will be a factor in determining which projects get built first, Wood Mackenzie said. “Projects that have the ability to move into construction using a sponsor’s balance sheet (e.g. equity, full-recourse corporate debt or project debt with sponsor completion guarantee) … enjoy a ‘simplicity’ and ‘speed’ advantage in the race to completion and … an advantage in securing market share.”

The shift away from project financing toward corporate debt is an advantage for the majors, said Matt Snyder, managing consultant at Wood Mackenzie’s Boston office. “For Shell, a so-many-hundred-million-dollar investment is a fraction of their balance sheet.”