Small is beautiful
Flexible, floating regasification terminals, taking less LNG over shorter periods, are on the rise, taking advantage of cheap prices and abundant supply
WHILE funding for large liquefied natural gas-export projects is drying up, interest in floating import facilities is on the rise, making marginal buyers seeking more flexibility – and smaller volumes – an increasingly important source of demand.
The popularity of floating storage and regasification units (FSRUs) is taking some in the market by surprise, particularly upstream majors that spent recent years paying out heavily on sizeable import facilities.
Forecasters continue to expect strong growth in gas demand. The US Energy Information Administration (EIA), for example, predicts global consumption will rise by 50% by 2035, when it will account for a quarter of the world’s energy use. The push for cleaner fuels, especially in China, will be a major spur.
Emerging gas markets in India, Pakistan and southeast Asia will also provide thrust. These buyers, however, will import their LNG in packages of under 1m tonnes a year, and the gas will be delivered on more flexible terms and over shorter timeframes. It marks a significant shift for exporters, which have typically sought to lock in LNG customers with 20- or even 30-year, oil-indexed offtake contracts.
“There has been a drop-off in long-term large quantity LNG sales-purchase agreements commitments over the past 12 months, in part reflecting the drop-off in major project sanctions,” says Peter Vaughan, a partner and co-head of oil and gas law at Ashurst, a law firm.
FSRUs appeal to buyers because they offer a flexible, cost-effective way of receiving and processing LNG for smaller or seasonal markets, sometimes as a temporary solution until onshore facilities are built.
“In the context of the LNG glut and lower oil prices, we are certainly seeing an increase in appetite for FSRUs, particularly in emerging markets,” Vaughan says. His firm is already advising Asian clients eager to install FSRUs.
The International Gas Union, a lobby group for the industry, says global floating regasification capacity amounted to 9bn cubic feet a day at the end of last year. The EIA expects this capacity to increase by 30% in 2016-18.
In Asia-Pacific, the growth of FSRUs has been modest – deployed on a small scale in China, Indonesia and Pakistan, with India and the Philippines expected to commission new facilities in 2016-17 – but is expected to pick up as smaller markets switch to natural gas for power generation. “Small-scale LNG regasification projects are finally becoming a reality in southeast Asia,” says Dan Reinbott, a partner in Ashurst’s Singapore office.
The pace of FSRU installation is helped by a surfeit of LNG and low spot prices in northeast Asia, where importers can buy cargoes for around US$5 per million British thermal units.
The global LNG oversupply and drop in oil prices – which has in turn driven down LNG prices that are indexed against Brent – might be hurting plans to invest in new liquefaction capacity, but gives importers a “unique opportunity”, says Reinbott. “LNG is now seen as a more approachable source of energy by many who previously regarded it as an aspirational fuel source.”
More contracts now include hybrid pricing – meaning they reflect both the prevailing oil and gas prices
That’s reflected in the contract terms buyers are seeking, says EIA economist, Victoria Zaretskaya. They want “shorter-duration contracts with volume and destination flexibility and hybrid pricing”.
More contracts now include hybrid pricing – meaning they reflect both the prevailing oil and gas prices – with options to index contract prices against the US Henry Hub price, the Netherlands’ Title Transfer Facility price, or the UK’s National Balancing Point.
The rise of trading houses with a position in LNG, such as Russia’s Gunvor and Japan’s Jera, is accelerating the change. “LNG trading now has many portfolio players with available flexible LNG volumes, which leads to a greater market liquidity and more transparency in price formation,” says Zaretskaya. “Increased trading and liquidity will stimulate development of gas-trading hubs in other parts of the world, particularly in Asian countries.”
Gautam Sudhakar, director of global LNG research at IHS Energy, a consultancy, says the new buyer preferences for shorter-duration and smaller-volume contracts is also giving importers “diversity in their portfolio so they are less dependent on any one or few, long-term suppliers”. He expects this to stimulate more development of smaller-scale liquefaction capacity, which “might be more justifiable in a capital-constrained world”.