LNG Markets in Transition : Will East meet West?

Transcription

1 LNG Markets in Transition : Will East meet West? Jean-Marc Hosanski World Conference Tokyo, June 2nd, 2003 WOC 10 Thank you Mister Chairman, Ladies and Gentlemen, Distinguished Guests, My objective today is to share with you TOTAL s views on some of the most significant changes which are reshaping all the LNG markets worldwide. I realize that 10 minutes is certainly a challenge for such a broad topic Therefore, I d like to focus my presentation today on one main question, which is whether or not we will experience a full convergence between the LNG markets located East and West of Suez. My Company is proud to be one of the leading players in the LNG Industry. With participations in 6 LNG Plants, 5 of which in production, our Group LNG sales amounted to about 6 Mt in 2002 and our presence in more than 40% of the worldwide capacity allows us to be active on all the LNG markets. This position gives us the opportunity not only to observe but also to experience day after day the reality of the markets evolutions and that is what I would like to share with you. 1

2 From two regional LNG markets toward one global LNG trade Asia - Pacific Asia - Pacific Atlantic & Med. Existing Flows New Flows Future Flows 2 J.M. Hosanski World Conference June 3 rd, Until the end of the 1990s, the world LNG map was desperately simple. 2 regional markets had developed with practically no inter-connection on both sides of the Suez Canal. The Mediterranean and Atlantic market developed first, with Algerian LNG supplying LNG to 4 Western European Countries and, marginally until recently, to the US. Algeria remains the biggest supplier in this part of the world, but new suppliers have emerged in Trinidad and in Nigeria. The Asia Pacific LNG trade developed somewhat later but experienced a spectacular growth since the 1980s with 3 importing countries in East Asia (Japan, Korea & Taiwan) supplied by producers in South Asia and Middle East. Interestingly enough, in spite of the physical separation of those 2 markets and in spite of the very different role that LNG plays on those 2 markets, they used to share very common structures : long term contracts, big volumes, limited flexibility, high take or pay. The basic reason for this was one common feature : Buyers were in a monopoly situation in their markets and one overriding concern was security and regularity of supply. The LNG map has become much more complex today, thanks in particular to the reduction of the costs - which make it economical to deliver LNG to much more distant markets. New LNG routes have been opened and significant LNG volumes are already flowing through the Suez Canal, across the Atlantic and will flow tomorrow across the Pacific. Is this globalisation likely to lead to a standardisation of the LNG business model and therefore of the commercial structures? Let us first focus on what is happening in the Atlantic Basin where the changes are the more obvious and let us focus on the drivers of those changes. 2

3 Impact of deregulation in Europe A growing number of gas buyers : Competing against former monopolies and for smaller volumes Short term trade growing steadily : 10% of European LNG trade Fostered by the development of gas hubs (NBP, Zeebrugge) Diversified and tailor-made commercial offers : Price indexes Introduction of spot price references Multiple destinations Certain practices challenged by EU competition authorities : Destination clauses Conditions for Third-Party Access Overall : 3 J.M. Hosanski World Conference June 3 rd, 2003 more fluidity in the market First let us consider the impact of market deregulation in Europe. The Deregulation Process initiated and promoted by the European Authorities and implemented with more or less enthusiasm by the European Governments, is certainly not complete but is well on its way. One important impact of the opening of the market is an increased number of Buyers and an increased diversity of Buyers. Among the new entrants we find: end-users, such as power producers, who can negotiate directly with suppliers / marketing companies, who want to develop their end-users market / Oil & Majors who play the aggregation, and, but that is already declining, pure traders. Those new buyers have one main objective and that is gaining market share. They are often directly competing with each other and the problem today is not just to know whether LNG demand will increase, but who will be the winning buyers on those markets. This new context is progressively changing the structure of LNG contracts : increase in number of ST contracts even if LT contracts predominate allowing buyers to better adjust purchase obligations to their sales Pricing formula increasingly diversified & adapted to market conditions, to ensure that LNG remains competitive against alternatives. Relaxation of destination clauses, allowing buyers to reduce exposure to a single market & engage into arbitrage opportunities. All this leads to a more liquid LNG market! 3

4 An impressive development of LNG infrastructures Bcm Regas. Capacity Existing LNG plant LNG plant project Existing receiving terminal Receiving terminal project Regas. Capacity Bcm Possible Decided/ Existing Possible Decided/ Existing LNG 4 J.M. Hosanski World Conference June 3 rd, 2003 The increased liquidity is also a result of the impressive development of LNG infrastructures. On the Upstream side : Nigeria & Trinidad already joined Algeria as suppliers. All have on-going or planned expansion projects. Other sources are being developed for the Western Markets : in Norway, in Egypt, and in the Middle East where Qatar is clearly positioned to become an important supplier to Europe and to the US. Other projects will soon follow : in Angola and in Venezuela in particular. On the Downstream side, the development of LNG receiving facilities is not less impressive. In Europe, while current receiving capacity is about 45 Bcm/y, the planned expansions and projects under construction will raise this capacity to about 75 Bcm/y by Other possible projects may well add to this capacity, in particular in Italy, Spain France and in the UK. In the US, the capacity of the 4 existing terminals should reach about 40 Bcm/y when Cove Point is opened. We believe that another 30 to 40 Bcm/y capacity could be opened before 2010 as the US market seems to offer bright prospects for much more LNG imports. Obviously, this assumes that the siting difficulties - which have proved to be very tough so far - can be surmounted. 4

5 Development of gas hubs in Europe Active Hubs Potential Hubs Existing Pipes Planned Pipes Existing LNG Terminals Future LNG Terminals TRANSPARENT PRICING GSO UK Norwegian Netherlands NBP Emden Zeebrugge Baumgarten Russian HEDGING OPPORTUNITIES Algerian Algerian 5 J.M. Hosanski World Conference June 3 rd, 2003 The third significant factor driving the changes in the Western LNG markets is the development of gas hubs in Europe. These are the points of gas exchange, where gas balancing, gas pricing, hedging & spot trading can take place. They have an impact not just on the way LNG is traded, but also on the way LNG is priced. The first European Spot gas market is born in the UK in early 90s. The liquidity of this spot market increased rapidly, helped by some supply surplus in mid-90s. Today, around 40% of physical gas deliveries in UK are sourced from the spot market. Zeebrugge is the first continental hub to develop, thanks in particular to the start-up of the Inter-connector pipeline in Other Hub may develop in the future in the North at Emden, in the East at Baumgarten and possibly in the South of France. So far, the impact of the spot gas markets on European LNG prices have remained limited, as most of LNG imports are received in Southern Europe, where spot market only plays a small role today. However, we expect this role to increase considerably in the future when the de-regulation process will be more advanced. Spot markets pricing based on hubs will then have a growing influence on the LNG contracts pricing, including on the Long Term contracts pricing. That comes with a good news and a bad news : The good news is : Price transparency The bad news is : More volatility ( but there is a cure : the hedging tools) 5

6 Market deregulation is progressing in Asia too The deregulation process has started : In Japan In Korea A slow but steady process Competition is already producing significant effects : Loss of monopoly / arrival of new entrants Reduced forward visibility Reduction in contract volume size Requirement for more flexible commercial terms Requirement for shipping control Pressure for new, innovative contractual terms 6 J.M. Hosanski World Conference June 3 rd, 2003 But let us now turn our attention to Asia. The liberalization of gas markets is also underway here : In Japan, the gradual opening since the mid 90s is significantly changing the position of the regional utilities In Korea, the Government is putting in place step by step a new market organization, with the aim to promote competition Clearly, full deregulation will take more time in both countries, as Governments wish to avoid the pitfalls of an un-controlled liberalisation process and advance prudently However the first effects are already significant on the Asian LNG markets : -Increased competition among the utilities -Increased uncertainty as to each buyer s future market share - and therefore as to each buyer future LNG demand As a consequence, Buyers require more volume flexibility, more destination flexibility and more duration flexibility 6

7 Emergence of new LNG markets in Asia A significant share of future growth Emerging Markets Japan Korea Taiwan China India Others 2002 New commercial risks & opportunities Huge potential LNG demand in India and China 2010 But highly price sensitive Impact on established markets 7 J.M. Hosanski World Conference June 3 rd, 2003 An other key factor in the transformation of the Asian markets is the emergence of India and China as new major consumers of LNG. Those emerging markets have a huge potential. In our scenarios, they represent more than 50% of the growth of LNG consumption in Asia from 2002 to The real potential of these new markets is however very sensitive to price. In fact, part of this potential would not materialize unless very competitive conditions are offered. The troubles faced by the Dhabol Project in India are a case in point. Time will tell how much impact the emergence of India and China will have on the Asian LNG markets. A significant impact for sure 7

8 Some key differences between East & West remain Limited domestic gas production Limited domestic gas networks so far Limited international pipeline connections so far No regional Hub yet More LNG to LNG competition than to competition How to implement a transparent gas pricing system? 8 J.M. Hosanski World Conference June 3 rd, 2003 While similar market forces are in action on both sides of Suez, some fundamentals differ. a first major and obvious difference is the relative weight of LNG imports in the satisfaction of the demand. Contrary to Europe where domestic production and pipeline imports account for more than 90% of the consumption, LNG imports account for more than 95% of the consumption in the traditional LNG markets of Japan, Korea and Taiwan. the lack of gas interconnections is another key difference. On the domestic side, while Korea has developed a large-scale integrated gas network, Japan regional markets remain not connected by a nation-wide grid. As for International gas pipelines, Asia has only few of them, all located in South East Asia. In North East Asia, several ambitious projects are on the drawing Board to supply Russian pipe gas to Japan and Korea but the hurdles that these projects have to overcome remain quite high. The lack of domestic production combined with the lack of interconnections make it difficult to imagine how a regional liquid gas hub might emerge. A lot has been said regarding the development of LNG trading activities in Asia and the possible emergence one day of a transparent spot LNG price. While there is no doubt that the short term and spot LNG trade will increase in Asia, there will be no transparent spot LNG price unless a real liquid exchange platform is conceived. Building such a platform purely on an LNG basis is quite a challenge. 8

9 Will the Atlantic-type LNG trade model extend to Asia? YES because the same fundamental forces are at work in East and West : Deregulation New players, new entrants, commercial innovations Cost reduction & increased price competition Need for flexibility : short term quantity options, seasonality Potential development of a Trans-Pacific trading zone BUT not to the same extent, as geographical, structural and regulatory differences remain strong economies at different levels of development centralised & liberalised economies Challenge of setting-up a more transparent gas pricing system 9 J.M. Hosanski World Conference June 3 rd, 2003 Now back to the initial question : will the Atlantic LNG trade model extend to Asia? In many respects, my response is yes, fundamentally because the same market forces are in action : increased competition, smaller lots of demands, more actors, more liquidity and more fluidity. Yes also because producers (and long term buyers of LNG) will more & more be in a position to arbitrage among 2 of the 3 markets, across Atlantic, Suez or Pacific. And that will obviously create more interference between those LNG markets. Does that mean that we are converging toward a single LNG commercial model worldwide? No, certainly not. Basic differences in geographical, structural and regulatory environment call for different answers. How will the future Asian Business model look like and how will it be different from the Atlantic Model? We may have to wait a few more years to know, but not that many years This industry has shown in the past that it was able to adapt quickly and meet new challenges. And it will again. Thank you for your attention. 9