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M&A and NOCs to change LNG world

Portfolio players and vertically integrated firms are transforming the way the industry operates

The global LNG industry is changing rapidly as a result of consolidation and the creation of new business models. Under Chatham House rules—where speakers cannot be identified—law firm Shearman & Sterling and Petroleum Economist co-hosted an event on the subject to celebrate the launch of a related new report, around the Houston Gastech conference. Attendees heard:

On M&A

It will continue due to the economic “law of gravity”. Capital is directed towards producing high priced fuels while consumers rush to buy ones with the lowest price. “This creates mean reversion and momentum that carries prices for a few years. Some will make mistakes and the happy ones will want to consolidate their position, so M&A happens.”

Much of what has been happening in the LNG industry over the last few years has to do with the entry of the US. “When the taps opened on the Gulf coast it introduced a cultural change. The deals being done now were unheard of just a few years ago and they are being put together at rapid speed. The companies behind the US projects approach life in a completely different way. It is good to see that level of energy and dynamism.

On gas competitiveness

Every time we have a small issue with the oil, such as a 10pc cut in supply, LNG production has to double. We do not need to worry about the long-term economics of LNG.”

On changes on the buy side

The increasing involvement of large LNG players in downstream gas and electricity is having an effect. Unbundling in the energy sector, particularly in Japan, Korea and even China has allowed third-party access to certain areas including pipelines, meaning firms can spread out across the value chain.

Gone are the days when power developers could make any purchasing decision and recover the tariff through its customers. A lot of the big power companies, particularly in Asia, we have seen make moves upstream into liquefaction and reserves and, likewise, gas resource holders are able to assemble a gas value chain right down to a power station or industrial facility.

The obvious advantage is that it helps with equity lifting, it helps secure a market for volumes of energy. The obvious disadvantage is cost and that will limit the number of players that can integrate in this way.

On energy access to all

One in six people do not have access to electricity so the demand for energy will keep on growing for a very long time. “At some point in the cycle the portfolio players, and those aspiring to be players, need to do their share of promoting the market. When we do not have buyers waiting we start to realise that we have to do something. To stimulate demand, with a bit of cash you could help gas terminals to get up and running, or help PPAs become bankable. Another way would be to become a player in the value chain.

On NOCs

NOCs, such as Saudi Aramco, are building to become major global participants in LNG. “To some degree it can create a push factor. A number of companies have significant financial resources to deploy if they decide to get into the industry and in a big way. That can that can help with future projects.

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