HOUSTON -- On the third day (Wednesday, March 13) of CERAWeek by IHS Markit, the industry’s business leaders outlined global economic trends, shifting geopolitics, emerging government policies and advances in technologies. The majority of the day’s sessions outlined how the transition will occur and to define the role that LNG will play in the process.
Demand for LNG. Twenty years ago, only nine countries imported LNG. By 2018, that figure had risen to 42. Expectations are for continuing strong growth. LNG demand is set to increase from 320 MMtons in 2018 to 465 MMtons by the mid-2020s. It should reach more than 630 MMtons by the mid-2030s, as more gas is used for heating and electricity generation, according to projections by Michael Stoppard, V.P. and chief strategist for global gas, IHS Markit.
The industry has reached a turning point with regard to LNG. After several years when optimistic talk contrasted with modest activity, the last six months have seen a sharp uptick in investment. Construction of large volumes of new capacity has started, featuring a variety of geographies, technologies and business models. There is an LNG export project underway in Canada, and a major reconfiguration of the Freeport, Texas, plant is ongoing along the GOM. Additionally, small floating projects in Mauritania/Senegal and Argentina are coming to the forefront. And construction is expected to start over the coming year on even more capacity.
To discuss these opportunities, an Energy Company of the Future session explored how companies are looking to reinvent themselves, to take advantage of changing technologies and the shift toward clean energy. Innovations offer the prospect to increase productivity of existing oil, gas and power activities, and to reduce their environmental impact. New opportunities are emerging in the production and transportation of energy, and the way that companies interact with the consumer.
Iain Conn, CEO, Centrica, (a UK utility company) said despite a push for other alternatives “natural gas will become more important in the next 20-30 years, and we plan to increase purchases of LNG from Cheniere.” Conn also gave a rundown on his company’s digital transformation: “Digitization will fundamentally change the way we do business, when we transition from a legacy business model, of product out, to the new customer data-in procedures.” This will be a big challenge for Centrica. Also, “viable battery technology is coming soon, and the overall pace of change is increasing,” Conn concluded.
More LNG players. The LNG industry has three major suppliers, Qatar, Australia and the U.S. After several years of moratorium, Qatar has announced growth plans, and the U.S. is expected to continue to add capacity. However, growth in Australia may be more limited. Meanwhile, Russia will likely emerge as the fourth pillar of supply, based in part on unlocking previously stranded gas in the Yamal Peninsula. Mozambique will also be a major new supplier
Despite robust demand growth, the market has served as the brake on even higher growth. The need to have a quality customer has acted as the constraint on development and financing, at least for the Asia-Pacific market, but that is starting to change, according to Stoppard. “Companies with sufficient size are moving toward developing projects on their balance sheets by moving ahead without the long-term contracts that have defined the business to date. Developers are now able to sell either to a growing group of aggregators or trading houses,” Stoppard continued. This model reconciles the need for up-stream investments to have long-term secure outlets, with the preference of many buyers for shorter-term deals.
Marketing LNG. Spot trading of LNG is growing at both the producer end in the GOM and the consumer end in northeastern Asia. New trading platforms are also being adopted. Industry leaders said the big question is how buyers will respond. Will they feel reassured by the investment and buy from aggregators or spot markets? Or will they prefer to arrange their own direct deals?
With the need to line-up long-term customers apparently no longer a constraint, what becomes the new brake on development? Certainly not the potential number of projects. The capacity of projects that have done or are doing serious preparatory engineering is more than 300 MMtons―almost the entire current global demand. There is a limit to how much risk the major international oil and gas companies will take, but it is potentially substantial, when measured as part of their corporate capital spend and overall strategies.
These questions were addressed in the Future of Global Gas session chaired by,Simon Blakey, advisor, global gas, IHS Markit. During the discussion, the panel discussed the way that U.S. LNG suppliers are transforming global trading patterns. And on the demand side, how buyers are seeking more flexible supply and opportunities for new applications.
The ample gas supply in the U.S. was a hot topic: “We don’t need to solicit or build infrastructure to get gas, producers deliver it to our facility,” said Michael Smith, chairman and CEO, Freeport LNG. Also, “LNG is being scaled down to modules and owner-directed development paths because of the lower costs of North American gas” said Robert Pender, Co-CEO, Co-Chairman, Venture Global LNG. A change in contracting, due to increased reserves, is also driving change. “The old strategic supply contract, (which requires a new agreement every five years or so) is being replaced by destination contracts, which will change the way that gas is marketed. In the near future, North America will represent 20% to 30% of the world supply. Every major player will have to have Henry Hub contracts in their portfolio, to ensure ample supply,” Pender continued.
Shri Tripathi, chairman and managing director, GAIL India Ltd, took the discussion in a different direction saying, “gas is not a transition fuel, it will have a significant place in the market in 30 to 40 years with developing countries, including Bangladesh and Vietnam driving gas consumption in the future.” Smith added, “we are building a fourth train at Freeport, which will come on-line soon, aimed at increasing our output capabilities. Europe is a great market for U.S. LNG, and we need to take share away from Gazprom, to break the Russian gas monopoly on Europe.”
LNG is poised to raise the quality-of-life for millions of people in India. “We have invested $20 billion in LNG receiving facilities. Within three to four years, 70% of people in India will have access to natural gas, but unfortunately, they may not be able to afford it,” Tripathi added. When asked what the biggest limiting factor for LNG expansion is, Tripathi added “logistical costs and new ship build-out; some shipyards are in financial destress.”
Drawing inferences from the past to avoid repeating mistakes. Cost management will be required, so developers can meet the accelerated scope while staying competitive. The industry must ensure that it does not repeat past experiences of cost overruns and construction delays. The biggest challenges for LNG are shipping costs and the threat of overbuilding capacity. Developers must ensure demand can keep pace with supply before adding unchecked capacity. That points to the need to push forward with innovative and collaborative approaches.