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ExxonMobil tempers LNG liquidity expectations

Major sees LNG market evolution, but cautions that hopes of a facsimile of oil or pipeline gas markets may be disappointed

ExxonMobil predicts further changes in the LNG market as contract lengths get shorter and some buyers seek to introduce alternative price references into their supply agreements.

But assumptions that LNG will move swiftly to a market where spot trade dominates and where all buyers abandon oil-indexed pricing may be wide of the mark, the firm’s vice-president for global LNG marketing Alex Volkov told Petroleum Economist at September’s Gastech conference in Houston.

What do you see are the implications for the more liquid and global LNG market that has developed over the last couple of years in particular?

Volkov: That is a great question. There is a lot of talk in the industry about the changing liquidity of the market. But I would say there is a variety of views on how far we will go, with some people claiming that the LNG market, sometime in the very near future, will be just like oil markets, or just like highly liquid pipeline gas markets in the US and northwest Europe.

I would say our view is more sensible. I think liquidity will evolve, but the pace of that evolution and the end-point is probably exaggerated by many. I think there are a few good reasons why the LNG market is different. First, the projects are very capital intensive and the project decisions are difficult. In order to secure revenue assurances for those projects, typically you need long-term contracts.

“Our view is that the demand outlook is very bright, primarily driven by emerging economies in Asia” Volkov, ExxonMobil

And if you flip it and look at it from a buyer’s perspective, it is actually not that much different. Who are the end buyers? In many cases, they are power generators or natural gas distribution companies. They typically have regulatory requirements; they have obligations to their customers for security of supply and for price stability. So that too lends itself to desire to conclude long-term contracts.

If we look at the new emerging markets—Colombia, Pakistan, Bangladesh—minimal import infrastructure exists in these countries. You have to build regasification terminals, you have to build pipeline infrastructure. It is unlikely that developers will build speculative infrastructure of that magnitude, so they are also looking for long-term commitments.

Finally, LNG is basically a perishable product. It is very expensive to transport and very expensive to store. All of that, in my opinion, leads to the conclusion that long-term contracts are here to stay.

It is, though, important to note that the nature of long-term contracts is changing. Newer, longer-term contracts will be lower in volume, they will be shorter in duration, maybe 7-15-year contracts versus 20-year deals.

But we still see long-term contracts as a mainstay of the industry. We still see many buyers interested in crude-linked pricing. Yes, some want to add Henry Hub components. And, from ExxonMobil’s perspective, we are willing to listen to our customers and meet their needs. But again, I think the pace of the liquidity evolution and its endpoint is being exaggerated.

There has certainly been a lot of talk that Asian buyers are rejecting oil link and asking for a gas-linked price, be it JKM or NBP/TTF. But we have heard so far this week that it may have been overstated?

Volkov: I am in that camp. There are certain buyers that prefer to build portfolios of their own — they have multiple supply sources; they have potentially more than one demand centre, they have some trading operations; and they would like some flexibility to extract additional value from their portfolio.

“What we can deliver, in common with just a few players that participate in the entire value chain, is reliable, secure and competitively priced long-term supplies” Volkov, ExxonMobil

But, at the same time, there are plenty of buyers that are simply seeking secure and competitively priced LNG supplies. We work with both kinds of buyers, in fact we are open to explore mutually beneficial solutions with multiple kinds of buyers.

And ExxonMobil has the portfolio and capabilities to service these different types of buyer?

Volkov: What we can deliver, in common with just a few players that participate in the entire value chain, is reliable, secure and competitively priced long-term supplies, which traders cannot. But, at the same time, we can provide spot cargoes, and we are willing to explore various forms of indexation using various components of our portfolio.

How long do you see the current supply abundance lasting before the market rebalances?

Volkov: It is extremely difficult to forecast those things. In the LNG market, supply for the foreseeable future is easier to forecast, because we know what projects have taken FID, what projects are developing, progressing, versus projects that are still under consideration. Demand is notoriously difficult to forecast.

Our view is that the demand outlook is very bright, primarily driven by emerging economies in Asia, China in particular. And we have seen in recent years what kind of growth potential could be there. For example, we have seen double-digit demand growth in China in 2017-18.

It is very difficult to say how long the current supply abundance might last, because it will all depend on the demand growth: a small adjustment to the demand growth forecast, by 1pc, even by just 0.5pc, could maintain oversupply for years to come, or could wipe it out completely in the next few years. So, I think market participants need to be flexible and be prepared for any eventuality.

Given the lead times of projects, four-to-five-years on the liquefaction side, is the LNG market condemned to be a cyclical market of boom and bust?

Volkov: You point out one of the key features of the LNG market. The projects are very complex, they take a long time to develop and bring on stream. You mentioned four-to-five years, but that is from FID. In order to get a project to FID, you need to add years in the lead-up.

“There is a lot of talk in the industry about the changing liquidity of the market” Volkov, ExxonMobil

Almost by definition, the LNG markets are bound to see supply grow in chunks, and this supply needs to find demand that is ready to be committed.

But the industry is evolving, and we have seen a couple of those innovative steps already over the last couple of years. One of those is financing for US liquefaction projects, and the various tolling or Fob sales models that allowed a shortening of the cycle and, possibly, easier financing.

The other concept that ExxonMobil and a few others have pioneered is one available to project developers with very strong balance sheets—that is, taking FID on a project without committed sales at that point. What we can do is make initial sales from a project, typically a sale to affiliate buyers, and then those affiliate buyers are free to market those volumes at the time of their choosing. We are using this concept for the Rovuma project in Mozambique, where the FID decision will be divorced from any marketing efforts. Some of the LNG may be sold in advance of FID, some may be sold later. This is another model where the cycle can be shortened and investment decisions be made easier.

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