New LNG: Who Will Cross the Finish Line First?
On the topic of increasingly globalized LNG markets, David Ledesma, Independent Consultant and Senior Fellow, Oxford Institute for Energy Studies, showed delegates at the European Gas Conference 2014 an image of Olympic sprinters crossing the finish line to illustrate the race among various LNG players.
He said it was a tale of three phases, the first up to 2014 - “short term-ism”: natural supply disruptions causing volatility, places like Yemen or Nigeria, which had had potential militancy, disrupting gas supplies; fundamental changes in domestic demand
Mr. Ledesma remarked: “We don't in the short-term what's going to happen. I believe Angola's ready to start up – is it going to, will it work? Who knows?
Or what about the 19-20 million tons of LNG which was under construction, most of it in Australia, set to start up in 2014. Again, there was also some uncertainty.
“One thing is clear in this period: potential delays
There was also the question of whether the countries in question wanted to export the gas at all.
It was all demand driven, according to Mr. Ledesma, who showed a slide filled with final investment decisions (FID) on liquefaction capacity from 2005 up until last autumn. He explained that becuase it took 5 years to get things up and running, FIDs from 2007 were only just coming online recently, explaining why there was such little capacity in the last 2-3 years
“That's why we've got so little volume coming on in the period running over the last 2-3 years, why we're seeing a tightening and why we're seeing the prices rise to where they are,” he explained.
Now, he said, the FIDs that took place in 2007 were starting to contribute to new supply coming on.
In a slide depicting actual and forecast projects in production, under construction and possible projected capacity 2006-2025, Mr. Ledesma showed that there was a squeeze of LNG available for the flexible markets. “That's where we are at the moment, which is why we're finding a relative tightness in the market. Let's be clear: the cargoes are there if you want them, you've just got to pay for them,” he commented.
Yet another slide showed an LNG global supply gap of 120-150 million tons per annum (mtpa) by 2025. “That's what the race is all about – which projects are actually going to fill that supply gap.”
The Yamal project, he reported, had taken FID before Christmas of 2013, a prospect not many believed in.
“They had some luck,” he said, “but a lot of determination, marketing, get to the right shareholders, get the right political support. When it really came home to me that this project was going to work was when I saw a port actually being built by the facility, being paid for by the government.”
According to him, the main LNG growth regions were Asia – China and the Southeast Asian growth markets as well as India (despite the challenge there on price); Europe's estimates for growth he characterized as “pretty sad” and dependent upon economic recovery; the Americas growth was limited to South America and the Caribbean.
Of the potential suppliers for the 120-150 mtpa were the US with 240+, Australia with 20-50, East Africa with 50-60, Russia with 30-50 and others with 200+ (adding up to 600+ mtpa).
In connection with the supply costs of that LNG, he offered, “My argument is that they all roughly land in Asia at the same price.”
Mr. Ledesma showed a chart that tallied the costs of gas, liquefaction, additional infrastructure and freight
“Whether it be East Africa or Canada, Australia conventional gas expansion, US Gulf regas conversion, the economics all roughly land in Asia,” he said, somewhere between USD 10-12 MMBtu.
Showing an extensive list of factors associated with US LNG export plans, like the fact that the shale gas revolution had reduced gas prices to make LNG export competitive, or that the infrastructure (import terminals) was already in place and could be used for exports.
“It's the brownfield conversions,” he remarked. “Where there's been a re gasification terminal which is converted into an export terminal, that's where you get your economic benefits, becuase you don't need to build a new port, jetty, tanks. Fundamentally, you've got a 25-30% capital cost saving on those projects.”
Access to local sub-contractors and skilled workforce were also presumably there, he said. New players, he added, meant new models for the LNG sector.
According to his slide, shipping to northwest Europe might occur at USD 9-10.25/MMBtu. He showed that NBP month +1 had only recently exceeded a USD 9-11/MMBtu band.
“Are you going to develop any project in the US based on the European market? Probably not,” he answered, adding that it might be part of such an enterprise's sales portfolio.
Regarding East Africa, he said it was possible to get from Tanzania, from Mozambique up to Europe in 16-18 days; India's only 9 days, and South America's 11 days. “So there are markets there that can access that gas in relatively shorter distances,” said Mr. Ledesma, who said the southern route might be preferred because of piracy.
While there was an abundance of gas in Mozambique, he noted that it was still a question of whether or not the country should export it. “If you take the estimates for demands for domestic gas in Mozambique and then you double and treble them, there's still plenty of gas to export. So, it's a no-brainer,” he commented.
The situation was a bit different for Tanzania, which had less gas per discovery, but for whom domestic gas demand was a question. Still, with estimates of 40 TCF, that translated into 1-2 LNG train project there, he opined.
Other questions surrounding Mozambique included the economics of the projects, how competitive will they be and would buyers see such projects as viable solutions. “All that will determine how much LNG will be exported from East Africa.”
In connection with LNG from Australia, Mr. Ledesma said that by signing long-term contracts buyers had made a commitment downstream in their market for that LNG to arrive – the deal between the buyer and the seller.
“But if you do a calculation: 2017, 21 million tons of LNG is actually going to be lost due to delays – and that's 6.5% of global LNG,” he explained. “The point I'm making is, if you commit to LNG from a country and don't know if it's going to go ahead - even if you sign for a contract but it's pre FID - you want to be pretty damn sure that LNGs going to go ahead.”
A slide of Australia LNG project costs showed that it was not a cheap proposition, especially when compared to Sabine Pass in the Gulf Coast of America, but Australian projects were closer to their markets. He noted that the costs of Australian projects had risen due to exchange rates, technical challenges, skills shortage and material inflation.
He added, “There are technical challenges. These projects are in locations that are extremely demanding.”
“All of these projects are seeking the 120-150mtpa market and, of course, they all want to be the winner,” remarked Mr. Ledesma. “That's the aim of it, isn't it?”
He listed all of the factors that needed to be fulfilled for the winners: upstream reserves;
project economics and development status; sales of LNG; government & geopolitical factors; sponsors; ability to finance; and the ability to deliver.
Finally, he revealed what the thought to be high, medium and low probability levels that projects would come to fruition.
Australian brownfield development was medium, being close to the market, but with uncertainty regarding CO2 emissions and changing governments. Australian greenfield projects didn't have the economics, he said.
While the US Gulf had gas reserves, good economic status, good sales, but a long way to market.
Western Canada was close to market, he pointed out. Meanwhile, projects in East Africa were not moving forward as expected due to government and geopolitical factors.
East Russia, he said, was coming from behind, according to changing policy in Russia. “Sakkhalin II expansion should have happened years ago,” he remarked, “and maybe Gazprom now realizes it is a no-brainer and suddenly wants to out compete Sakkhalin I.”
Among his conclusions, Mr. Ledesma said, “New supply projects are racing to secure the market and I think we are going to see new markets and business models.
“It's a time of change and all of us need to embrace that change – commercial as well as technical. Because of the high costs that are taking place this market needs innovation.”