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Global LNG market

Riding the gas rollercoaster

The global LNG market has been on a rollercoaster ride from red hot to deep freeze in recent years. Many on this ride have had their hearts in their mouths at times. What do the fundamentals really look like, though? We spoke to Michael Stoppard, Chief Strategist Global Gas at IHS Energy and Vice Chairman of IHS CERAWeek.

What does the crude slump mean for many pending LNG projects?

We actually saw four projects make final investment decisions even in the difficult circumstances of 2015. However, these were projects that already had substantial momentum from before the price collapse. There is a danger that some provinces have missed their window of opportunity and gas will remain stranded for many years or decades. There are still buyers out there, though.

Technological advances have dramatically cut costs in the shale upstream. Do you see LNG plant capex also coming down as technology improves?

The LNG industry has to address its cost structure urgently. General upstream capital costs – as represented by the IHS Upstream Capital Cost index  – increased by 129 percent between 2000 and 2014. Liquefaction capital costs appreciated a lot more, increasing three or four times. These high costs helped turn LNG into a luxury product that has started to lose ground in key markets to the cheaper alternative of coal.

High costs helped turn LNG into a luxury product that has started to lose ground in key markets to the cheaper alternative of coal.
Michael Stoppard

 

The IHS Upstream Capital Cost Index fell by 24 percent from 2014 to 2015. But specific LNG costs are not likely to come down sharply simply as a result of general industry deflation. The key will be innovation, both technological and commercial. Technology options include miniaturization and modularization.

Traders and trading houses seem to be becoming a more prominent part of the LNG ecosystem. Why? And do you think this is a trend that will continue?

The role of trading houses remains very small. We estimate their share of the global gas market at around 2 percent. Trading houses believe they will be able to take advantage of the LNG oversupply and the associated growth in flexibility and liquidity.

In the last decade, we have seen banks attempt to enter this space. Their model aimed to exploit – or arbitrage – different gas prices across the world. But their entry met with limited success, as they found it difficult to successfully operate on an asset-light strategy.

Trading houses may have more success. They have been prepared to take physical asset positions – like storage or regasification – to help them find opportunities. The opportunity to arbitrage global prices is much reduced in today’s lower-priced environment. The real strength of the trading houses has been a willingness to sell LNG in emerging markets, where customers have lower creditworthiness than traditional LNG sellers are accustomed to.

Besides the national and international oil companies (NOCs and IOCs), who is pulling the strings in the LNG market?

The US model is bringing in some far-reaching changes. Generally, the IOCs and NOCs have had to invest billions of US dollars in building and owning liquefaction – that has been a necessary price to pay for bringing gas reserves to market. But the US tolling fee model opens up the possibility for new sources of financing to own and build liquefaction, potentially making it look more like an infrastructure service-type business.

Will the current LNG price slump cause a demand boom? If so, where?

The slump in LNG prices may create a greater likelihood of incubating new markets in the longer term. It will probably take a couple of years of weak prices before buyers have the confidence to commit infrastructure linked to future LNG. We should remember, however, that it is not simply LNG prices that have fallen.

Global LNG Demand

Which markets do you think hold the most potential as future demand sources?

In the short term, Chinese gas demand has stalled, and observers are dialing back their expectations. India remains a bright spot with large untapped potential. We expect big increases into Europe over the next few years – to some extent, reflecting the lack of better alternatives to place the LNG. Because Europe has liquid spot markets and an extensive regasification infrastructure, LNG developers can push LNG volumes into the market aggressively if they choose to do so.

Large-scale LNG plants are still on the drawing board in Mozambique and Tanzania; then there is the long-discussed Train 7 of Nigeria LNG, as well as Alaska LNG, British Colombia’s plethora of proposed plants. Can any of these compete with the US?

It is difficult to make countercyclical investment decisions at the best of times, and even more difficult when companies are under pressure to cut spending and defend dividends. Also, the competitive advantage of the US has been increasing. A recent study by IHS, Shale Gas Reloaded, issued in February 2016, concludes that the volume of the shale gas resource base has expanded, while cost has come down.

The competitive advantage of the US has been increasing.
Michael Stoppard

 

Whereas our previous study of five years ago suggested there were 900 trillion cubic feet (Tcf) of shale gas recoverable at a cost of US$4 per million Btu, the most recent and more detailed assessment identifies 1,400 Tcf at US$4, and some 800 Tcf that can be produced for less than US$3 at current costs. This lowers the feedstock cost of US LNG. Some international LNG projects can compete at those levels; most are more expensive.

How great a role can LNG realistically play in transport, given its storage demands?

Low oil prices have reduced the stimulus of fuel cost savings and are now holding back the development of LNG in the transport fuel market. But fuel cost savings have never been the real driver; environmental concerns are the main factor here. Many long-term forecasts of LNG demand continue to underplay this opportunity.

Ed Targett, business journalist based in London
Picture credits: Jocelyn Bain Hogg