LNG's brave new world
LNG has been thrust into the spotlight by its starring role in China’s ‘Blue Sky’ revolution, but is the industry ready for rapid change?
An anticipated acceleration in LNG's commoditisation, driven by factors such as increased natural gas demand and newfound confidence in its potential as a marine fuel, is expected to hand it a much larger role in global energy markets.
But LNG's legacy pricing structures and contract terms do not seem to square with such a rapid evolution.
At the same time, a wave of mega-project approvals targeting an expected market tightening in the early 2020s has been taken with the expectation of solid demand growth and pricing stability.
Petroleum Economist talks to Hans Kristian Danielsen, senior vice president at DNV GL, about how these issues are likely to evolve over the next decade.
PE:There has been lots of talk at LNG2019 about the affordability of LNG—is there a danger that low prices could limit investment in LNG mega-projects?
Danielsen: There is so much opportunity in the LNG market just now, and common sense tells us that there is a bright future ahead. But the momentum is really slow.
On the supply side, we see the massive import increase in China. In just a year it consumed almost all the world's LNG surplus, delaying the emergence of the expected oversupply and creating a market much more like the post-2020 reality. This highlights that there is going to be a need for much more liquefaction capacity, and we already see Australia back-filling its projects and LNG Canada being sanctioned.
This highlights the health on the supply side, but our investigations show that, if you look to 2050, we expect another 30mn t/yr coming from North America but 40mn t/yr coming from the Middle East. The Middle East's contribution is not really on the industry's radar. We see a wider awareness of North America and Australia compared to the Middle East's huge anticipated contribution to LNG supply—it is a blind spot on the supply side.
There is a bigger frustration on the demand side, particularly in regions such as southeast Asia. Here nations want to import LNG, but, without an existing business model, they do not know how to establish links with LNG players.
They do not know what permitting processes to run, so it all takes much more time and we see some of the FSRU operators going from being a provider to actually eyeing the whole value chain, just because they know how to deal with licensing processes.
PE: What the biggest concerns in the LNG industry at the moment?
Danielsen: If we go around the globe you will find very different challenges. In east Asia, the concern focuses around availability of supply, for example in China. In the US, there is a struggle for finance so there is a bit more concern over price fluctuations and capex funding. In southeast Asia, they are more concerned about slow regulatory processes. Finally, in Europe they are more focused on environmental protection and fears of the green movement limiting LNG's future.
PE: As a seaborne product, does a dependence on LNG imports create more geopolitical risk for developing nations? For example, China could always return to domestic energy sources, however environmentally damaging, if the trade war worsened. Do you see LNG as increasing a country's political exposure?
Danielsen: I would say the opposite, in that, by basing your gas supply on LNG, then you are making it more flexible to potential political tensions around the world. Because there is supply from the US, the Middle East and Australia, even from Norway.
Traditionally it has been based on long-term industry contracts, with the likes of South Korea and Japan having 25-year contracts with say Australia or Qatar. But we are seeing portfolio players coming in now and operating between buyers and sellers to either split up cargoes or term-length and supplying to others. This creates even more opportunities for developing nations to diversify their LNG portfolio.
We are already seeing countries doing this with some success, for example Lithuania and Poland. In the beginning they did not import very much—only as a backup to Russian supply—but now they are importing a lot and it is a powerful counterpoint in terms of energy politics.
This is also having an impact in Germany, which is, of course, quite reliant on Russian gas. As it moves towards renewables and away from nuclear and coal power, it has increased its plans from just one to three LNG terminals. Whether it actually uses them or not depends on how friendly it can stay with Russia and how much additional capacity Norway can offer in the next 15 years. If that does not work out, they can still buy LNG from the US.
PE: DNV GL recently completed a quite comprehensive survey on the LNG market, what was the most surprising finding in it for you?
Danielsen: It was really the lack of awareness of what is going on in the Middle East. The industry is not paying enough attention to the capacity additions that will come from Qatar, though these are very significant. Qatar is in a unique spot geographically and in terms of resources to capitalise on LNG growth.
PE: How do you think the oil-indexed pricing situation will evolve over the next decade?
Danielsen: There will be an increasing need for flexible LNG pricing. When it is tied to oil and the oil price rises, LNG becomes less competitive in comparison to renewables.
At the same time, both the buyer and the seller have a long-term need for secure financing. In any typical LNG project, 80pc is sold off in long-term contracts and profit is made from the remaining 20pc. This is still a necessary business model for LNG, although we are already seeing more spot trading and portfolio plays.
I do not think that oil-indexed pricing will disappear overnight. It is the nature of the industry that you need a long-term commitment for such large facilities to be built. Realistically we will see both but with more flexibility. Another factor is the increased usage of LNG as a transport fuel. This will demand that shipments be broken up into smaller blocks.
PE: How big an impact has the US-China trade conflict had on LNG's growth this year?
Danielsen: The US has significant supply and I understand that China will currently be reluctant to buy from US sellers, as they represent a strong negotiation card in the trade war in the short term, and they can turn to Russia, say, or Australia. If the trade war is not resolved the LNG industry would suffer, along with others. But this is only an indirect impact and it could change quickly if relations improve, as I believe they will.
PE: Finally, do you ever see there being an Opec-style organisation for LNG to help address pricing uncertainty?
Danielsen: I hope not. I believe that market forces actually handle price stability better than a cartel.