COVER STORY TAKING THE GLOBAL STAGE AMERICAN GAS JUNE 2016

Transcription

1 COVER STORY TAKING THE GLOBAL STAGE 20 AMERICAN GAS JUNE 2016

2 Global LNG trade was hot in 2015, despite high supply and the low cost of oil contributing to declining prices. New players to the export market already have their sights set on the future, with U.S. and Australian LNG poised to make the A-list. BY M. DIANE McCORMICK ILLUSTRATION BY HARRY CAMPBELL Liquefied natural gas is the young star on an increasingly global stage where the scenery is constantly shifting to accommodate changing contracts, buyer and seller diversification, price indexing and, enter stage right, U.S. LNG exports, which bring a whole new dynamic to the show. The final scene is far in the distance, but in examining the state of LNG in 2015, industry experts predict a vibrant industry ready for significant growth. The global LNG industry plays a key role in expanding access to an energy resource that leads to a lower-carbon future, cleaner air in metropolitan areas and a prosperous economic future, said a summary of the International Gas Union s 2016 World LNG Report, which was unveiled in April at the 18th International Conference & Exhibition on Liquefied Natural Gas in Perth, Australia. Of course, big changes prompt big questions. Some experts say LNG must overcome hurdles and challenges on the way to its promising future. Amid the increase in global activity, declining oil prices and weaknesses in Pacific demand led all global LNG price markets to fall in 2015, from an average of $15.60/MMBtu in 2014 to $9.17/MMBtu in Over the next two years, significant new export capacity in the Pacific Basin is set to come online and further expand Intra-Pacific trade flows, the World LNG Report states. Asia is still primed to remain the largest driver of demand growth given its expected contract ramp-ups, though the region began to show several potential signs of weakness in New LNG supplies combined with weaker economic growth, increased competition from competing fuels and drastically lower oil prices will place downward pressure on LNG prices. New and Growing Markets The results of COP21, the December 2015 Paris climate conference, projected both uncertainty and potentially exciting opportunities for LNG, IGU President David Carroll noted in his introductory message of the report. The global social and political groundswell illustrated by the COP21 agreements suggest that gas can be a critical part of the globe s future energy mix, Carroll noted. In this atmosphere, the word growth is heard frequently. Will demand grow in existing markets? Will new markets open up to absorb supply? The LNG industry must deal with more moving parts as the global marketplace gets larger and more fragmented, said Andrew Slaughter, the author of Deloitte s LNG at the Crossroads: Identifying Key Drivers and Questions for an Industry in Flux. Options are opening up on the market side, with proliferation of new markets in Southeast Asia, the Baltic, Latin America and even the Middle East, he said. Many eyes are on Europe, a site of growth in By and large, the regasification infrastructure and associated pipeline networks are built out in developed markets, and current regasification capacity is underutilized, running JUNE 2016 AMERICAN GAS 21

3 COVER STORY Anywhere the gas is produced, the United States is the cheapest, most efficient, most economical producing region in the world, period. Corey Grindal, Vice President of Supply, Cheniere Energy at about 30 percent worldwide, said Ted A. Williams, the director of codes and standards for the American Gas Association and vice chairman of the IGU World LNG Report Task Group. However, European LNG markets must be supported as a hedge against eastern pipeline supply uncertainties and aggressive pricing, Williams said. These risks present unique challenges when coupled with declining demand resulting from fuel substitution and lower energy intensities in European economies, he said. As for the impact of geopolitics on the LNG trade, many analysts say that stable economic growth remains the prime driver in energy industries. Investors want to develop profitable supply projects, Slaughter said. Buyers want reliable, affordable gas supplies for their power plants or end uses. Williams agrees that the industry is guided by specific market opportunities and threats, but two important exceptions are noteworthy. The long-term inevitability of Iran s entrance into the world LNG export model will have significant implications for trade originated from the Persian/Arabian Gulf and supply in general, he said. The second exception is the European Union s pending proposal for a unified LNG and gas storage strategy. The strategy is meant to blunt the dominance of Russia in supplying energy to countries in western and central Europe, but skeptics note that the EU doesn t have the resources to implement such a strategy, Williams said. However, if industry can develop contractbased commitments to supply LNG, the strategy might be put into play and serve as part of the supply portfolio, he said. Ample LNG supplies can free western and central Europe from fears of Russia stopping natural gas pipeline flows, according to one authority. However, Russia could maintain market share if it follows U.S. prices, which have the potential of becoming a minimum price. Energy efficiencies could also upend the model of relying on continued economic and demand growth in markets. Compared to past years, the same growth requires less energy, and industry experts say energy sellers must adapt. Smaller markets ramping up their baseload power generation with natural gas can create steady demand, Williams said. Receiving markets are also interested in such small-scale operations as floating storage and regasification units that are justified by power generation and have total capital costs that are much more manageable than greenfield, large projects, he said. New projects in Australia are expected to increase the country s liquefaction capacity by 53.8 MTPA, according to the LNG report. To the extent that Australian projects are contracted, buyers economic growth or stagnation won t have much effect, said Graeme Bethune, CEO of energy analyst and strategist EnergyQuest in Adelaide, South Australia. But in the long term, Australian gas is competing with coal, renewables and nuclear in all the buyer countries, and LNG is competing with indigenous gas production and international pipeline gas. The United States, now shipping from the lower 48 states with Cheniere s first commissioning cargo in late February, is reaching across the globe with its exports. Cheniere sales include India, South America and Europe, which is the most likely destination for a lot of our cargoes because of its efficient route, said Cheniere Energy Vice President of Supply Corey Grindal. Cheniere also has relationships with companies in all LNG-consuming countries and will sell to willing buyers worldwide, he said. U.S. efficiency and the low cost of natural gas supply, and its flexibility to export or consume domestically as markets shift, support its competitiveness, Grindal said. Anywhere the gas is produced, the United States is the cheapest, most efficient, most economical producing region in the world, period, he said. Flexibility in Contracts and Pricing Like growth, the word flexibility emerges often in discussions about LNG s future. Changing contracts and pricing are the most interesting part of today s LNG story, said Christopher Goncalves, managing director of Berkeley Research Group in Washington, D.C. Abundant supply is stimulating buyer confidence, short-term trade and delivery flexibility, he said. In his report for LNG 18, Be Careful What You Ask For: Opportunities and Risks in the New Natural Gas Abundance, Goncalves said that new markets are critical for absorbing oversupply. Abundance leads to commercial change, with sales and purchase agreement oil-indexation slopes subject to review and renegotiation, increased reliance on short-term markets, and hub and hybrid-hub-oil indexation used for diversification, increased flexibility through elimination of destination restrictions, relaxed take-or-pay contracts and cargo cancellation rights. In this changing environment, lines are getting blurred as buyers and sellers diversify, and they start to look a little bit more like each other, said Goncalves. 22 AMERICAN GAS JUNE 2016

4 Everybody has a natural hedge. Williams adds that traditional long-term, short-term and spot trading are further blurred by creative use of diversion clauses and other contract mechanisms that add to market liquidity. In recent weeks, even Tokyo Gas and Osaka Gas, Japan s largest importers traditionally operating on long-term importation contracts, have announced business ventures to redirect and possibly reload LNG cargoes. Today s export industry participants are price takers and are subject to external factors in the importing countries, Williams said. The LNG industry, especially in the case of emerging U.S. exporters, must adapt to these fundamental drivers but can facilitate growth by more broadly adopting flexible contract terms and price indexing and, in the short term, making basic business decisions considering project costs as sunk and making pricing and other short-term decisions on variable cost pricing, he said. Diversification in contracts can buffer buyers from the vagaries of the spot market and sellers from granting excessive premiums and discounts in long-term contracts, Williams said. The approach is to diversify and look at some measure of demand to be met by long-term contracts and some by non-longterm, that is short to medium contracts, and spot trades, he said. However, as some experts have noted, circumstances can affect buyer flexibility. In the mature U.S. market, buyers can seek long- or short-term conditions. The same is true in northwest Europe, where buyers sure of ongoing supplies don t need to commit long term and can make decisions based on price. By contrast, Japan is a nation of islands forced to make long-term commitments in order to assure supply. That form of contracting helped develop the industry, but in mature markets, amid an environment of excess product, not all buyers must make long-term commitments. About 90 percent of Australian exports are tied to long-term contracts, said Bethune. The producing projects are all aiming to make or are already making short-term or spot sales in addition to their contracted volumes, he noted. As the United States and Australia ramp up their exports, Japan has also been trying to diversify pricing in new contracts, said Bethune. Traditionally indexed to oil, contracts are now including Henry Hub pricing. One reflection of this is that the Australian LNG company Woodside has also contracted for U.S. LNG so that it can offer Henry Hub-linked LNG as well as oil-linked, Bethune said. Those rising exports from Australia and the United States are likely to increase market liquidity, he said. The Australian projects are largely contracted, but the end-buyers are likely to redirect their cargoes if they are temporarily overcontracted. The Australian volumes will also push out current suppliers of short-term or spot LNG to Asia, which will have to find other markets. Waiting on the Go-Ahead With 18 MTPA of capacity under construction in North America expected to be completed in , we see the North American capacity growth to put it in the position of a major export region, Williams said. Seventeen countries exported LNG in 2015, according to the World LNG report. In addition to the MTPA in 2015 liquefaction capacity, 41.5 MTPA are under construction and another 890 MTPA are proposed, for 46 percent growth by Many projects are awaiting final investment decisions, and prospects for go-aheads remain relatively muted in 2016, the report said. Capital expenditures are under pressure from low oil prices, and buyers hesitant to make long-term commitments might opt for increasingly flexible short-term contracts. However, security of supply remains a concern for some long-term buyers, so projects with compelling economics are more likely to reach FID in Through the chain of developing projects, it s very likely and highly standard for companies to only go forward with construction based on firm plans to produce on that capacity. Otherwise, project financing becomes highly suspect, said Williams. Today s investment in liquefaction facilities is lumpy, said Deloitte s Slaughter. That s when capital gets ahead of demand. Investors have to hit the pause button and basically wait for demand to catch up to give the signals to invest, he said. It will come around. In the 2020s, there will be an investment case. And as one high-level executive said at LNG 18, the action of large players making countercyclical investments will help spark approval of new projects. These companies have the clout to invest while the market is weak and costs are lower, although patience will be required in the wait for costs to fall even further. Proponents of long-term commitments to LNG infrastructure will have to weather today s short-term supply-demand instability, he said. Feeling the Difference The impact of U.S. LNG exports ripples across the domestic natural gas industry. Cheniere has more than 125 sales and purchase agreements with just about every (U.S.) producer you could probably think of, sourcing natural gas from traditional and emerging fields, said Grindal. We want to be able to be diversified so we re not dependent on one geographical area. We don t want to be dependent on just a few producers, he said. More buyers and more sellers give more optionality in transactions, said Slaughter. The United States entering the market as an exporter could accelerate that. It s the opportunity to bring different contractual models to the trade and maybe favor more short-term and flexible trades. Europe is known as a strong candidate for buying U.S. LNG, experts agree, because its western European energy terminals are at 20 percent of capacity. As long as the price is right, the continent is believed capable of absorbing many molecules. u JUNE 2016 AMERICAN GAS 23

5 COVE R S TO RY THE GLOBAL STATE OF LNG The International Gas Union recently released its 2016 IGU World LNG Report, which showcases the many ways the LNG global market has changed over the course of Total LNG trade last year grew to million tons, up from 4.7 million tons in 2014, which makes 2015 the largest trade year in the LNG industry s history. As a result of this increase in trade, close to 10 percent of the world s demand for natural gas is met through LNG. Even though fewer countries exported LNG in 2015, projections are up for future exports as global nominal liquefaction capacity reached million tons per annum in January 2016, an increase of about 10.5 MTPA over the course of This map highlights these changes and offers a glimpse of the IGU data from a global perspective. These 10 countries imported the most LNG in 2015, for a combined total of MT, or 83 percent of the total LNG trade volume. Four new import markets emerged in These countries imported a combined total of 6.0 MT of LNG. Imports to Poland support the European Union s focus on LNG to help meet its energy security needs. The top five of the 33 exporting countries sent much of their LNG to Asia and Asia-Pacific, which took in 71.7 percent of total imports. Europe saw its first LNG import growth since Global liquefaction capacity construction in these countries reached MTPA in January Proposals for additional liquefaction projects in Australia, Qatar and the United States equaling more than 200 MTPA contribute to a projected 46 percent increase in liquefaction capacity by AMERICAN GAS JUNE 2016 Source: International Gas Union 2016 World LNG Report

6 A big year for trade paired with new import markets and a handful of liquefaction projects reaching final investment decision means global LNG is on the rise, despite declining prices. JUNE 2016 AMERICAN GAS 25