Gas Matters

I spent 2 days at the LNG Global Congress in London at the end of last month.  The event is well attended and well-liked by industry players and serves as a useful barometer for the gas industry as a whole.

It was clear that many supporters of gas were present and they claim that gas is uniquely positioned to address the challenges of population growth, economic development, the environment and affordability.  Furthermore, natural gas is abundant, has low emissions, is the lowest cost low carbon technology, and its uses are moving beyond power generation and chemicals feedstock to transportation.  The extent to which gas has penetrated the transportation market comes as a surprise to many outsiders and examples include Compressed Natural Gas (CNG) in cars and Liquefied Natural Gas (LNG) used as ship bunker fuel.  LNG is even being used as fuel for drilling rigs in the U.S.

There was much discussion on the gas price in North America.  Henry Hub (HH) serves as the North American benchmark gas price and is located in Erath, Louisiana.  Recently the HH price has been less than $2/MMBtu, though speakers were carrying a medium term forecast in the range $4-6/MMBtu.  The North American gas market is captive and the recent surge in shale gas production has dampened prices.  However, factors seen to put upward pressure on gas price include the high cost of shale gas (which are quoted elsewhere as ranging from $4-9/MMBtu), potential exports of LNG, and the penetration of gas into the transportation market.

Others feel that downward pressure on price will prevail.  They expect shale gas to become cheaper and highlight that much of shale gas economics are driven by liquids content, enabling the producer to “almost give the gas away”.

Cheniere (the U.S. based LNG importer turned exporter) is betting on low U.S. gas prices to provide support for its plans to turn U.S. LNG regasification terminals into liquefaction export terminals.  We wait to see whether the U.S. consumer and their politicians will tolerate the potential for U.S. prices to rise to something approaching the global norm.  Nevertheless, the recent export deal that Cheniere struck with BG Group must be seen as something of a seal of approval.

There was also some discussion as to whether the gas business is becoming less regionalised and whether a global price for gas will develop.  A global price for gas (as there is for oil) would have to be driven by LNG spot trade and as about 25% LNG is traded on the spot market and only 10% of global gas is in the form of LNG, a global price for gas will not develop any time soon.  It was felt that most gas (and particularly LNG) projects will continue to be sold on long term contracts due to the large investments made, the risks taken and the difficulty in raising finance.

Most speakers noted that growth in demand for LNG continues strongly with Asia (China, Japan, Korea and India) particularly strong.  European demand growth, largely due to increased UK imports, is also strong.  Meanwhile, big LNG producers, such as Qatar, Malaysia, Indonesia and Nigeria, are being challenged by significant existing and potential new volumes from Australia (which is already the world’s 4th biggest producer) and in the longer term from the U.S.

Australia is a country with significant gas reserves and big plans to export LNG into the Asian markets.  Investors in the shale gas play will be hoping that these volumes safely find an export market and do not end up flooding the domestic market.  Either way, it is commonly acknowledged that Australia is a very expensive place to do oil and gas projects, with reports of construction workers earning several hundred thousand dollars a year.

Though LNG is predicted by most to continue its run of strong growth, constraints to growth do exist, including:

  • Capacity in the Engineering Procurement and Construction (EPC) contractor market is tight and input prices are rising.  Liquefaction projects are getting more expensive with a cost of $1,000/tonne being typical (in Australia it is significantly higher).  It should be noted however that U.S. conversion of regasification terminals to export is expected to be much cheaper.
  • Project finance is more difficult as the number of active banks has fallen, lending has dropped and there is a general lack of liquidity.
  • The shipping market is tight with day rates increasing to $150k/d.  With demand potentially outstripping supply, speculative ordering has increased.

With new LNG projects requiring a robust gas price of $5-10/MMBtu to achieve a 10% return we await to see which markets will prosper.

Note:  The LNG Global Congress was run by Informa on 27/28 June 2012

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