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.