LNG firms struggle with investments in volatile market

Uchenna Izundu
International Editor

BARCELONA, Dec. 18 -- Gas companies are uncertain whether to make LNG investments as gas demand falls due to high prices and the economic downturn, speakers said at the CWC LNG summit in Barcelona.

The financial crisis will affect the pace of future projects, cautioned Elizabeth Spomer, BG North America's senior vice-president of regional business.

Despite shaky demand, Spomer expects to see 50% growth in global LNG production capacity over the next 3 years resulting in choice for buyers, but she also warned of a supply crunch in 2012-15 as developers scale down plans for new production facilities. "We are about to see a supply surge…It is really unprecedented," she said.

Spomer estimated that 14 million tonnes of LNG would be delivered from the Atlantic basin to Asia in 2008—double what was sent in 2007.

But Asian demand is falling and operators are unsure of which projects to pursue, as it is unclear what global LNG demand will be. "Markets don't know how much gas they need," Spomer said. "With that kind of uncertainty it's very difficult to do business."

Return to fundamentals
However, Octavio Simoes, vice-president of commercial development at Sempra LNG, was more upbeat about the outlook for LNG. "We don't think there will be significant demand destruction" or that over the next couple of years prices will be greatly affected. "Natural gas is being driven because of environmental reasons," Simoes said.

Simon Bonini, director of LNG at Centrica Energy, said that as the UK becomes a major LNG importer, producers will have to take a long-term view on gas prices. By 2010, the UK will import 50% of its gas needs, and this will rise to 75% by 2015 as the decline of gas production on the UK continental shelf is steeper than anticipated.

"The effects of the new changes in the [global] LNG market have not yet been understood, and we have seen very extreme changes," he said. "We need to make sure that we diversify and have a quality portfolio."

With the steep increase in oil prices, LNG sellers increasingly have diverted cargoes upon arbitrage to higher priced markets, particularly the Asia-Pacific basin, leaving other buyers scrabbling for supplies. LNG buyers said good relationships with suppliers are essential, and they called for suppliers to charge reasonable prices in establishing contracts.

For emerging economies, the key issue will be: when will they realize their potential? "It's important to have long-term contracts between sellers and buyers even with the growth of spot LNG," said Kentaro Morikawa, senior vice-president of LNG Europe at Tokyo Gas Co. Ltd. "LNG can be sold at a reasonable price so that sustainable growth can happen."

His comments were echoed by Jose Simon, gas supply vice-president at Iberdrola, who stressed that the nature of the LNG business is long-term, and cooperation between producers and consumers is critical. Where to secure supplies has been a growing quandary, and a trend has emerged: Downstream companies have moved further up in the chain, and producers have moved downstream to offtake their gas.

Changing business models
The changing market means players have become more flexible in their commercial agreements, and they have changed their business models. Speakers agreed new technologies and operational concepts must be developed to address the new dynamics.

Steven Sparling, partner at US law firm Sutherland, called for operators to determine early in their LNG project whether their ships can access the planned terminals when desired. He stressed the importance of vetting information as many companies had failed to do so, assuming that someone else in the process had.

"You need to assess the state of play, commercial perspectives, operational flexibility, legal rights, and obligations—both regulatory and contractual. People need to find out who's at the terminal, what is their arrangement, and how will that affect yours."

LNG contractors have been hit by soaring costs of commodities, labor, and materials as demand has increased over 4 years. Gerald Humphrey, vice-president of business development for global LNG, Chicago Bridge & Iron Co. NV, said structural steel had gone up by 300-350% over the last 4 years, while copper had risen 350%. Currency fluctuations of 15% variance have added to project development costs. "Project complexity has also increased costs; we were doing trains of 3-4 million tonnes/year in size, but now, for example, in Qatar they are 8 million tonnes/year. Big projects put a strain on the chain." Contractors' net profits have been 1-5% on projects.

Operators are hopeful project costs will fall as have commodity prices. The question is: How long will prices drop, and at what level will they stabilize? These factors are influencing investment decisions, delegates told OGJ.

Humphrey estimated commodity prices would be stable until second-quarter 2009. With varying factors, his company is promoting to clients a "hybrid model"—not quite a lump sum contract or a reimbursable one—to help spread the risk. He told OGJ that a third of the firm's contracts with clients fall under this new model.

"The IOCs are accepting it very quickly, and some national oil companies are being hesitant …People now ask for bid validity, which was unheard of before."

Contact Uchenna Izundu at uchennai@pennwell.com.

Related Articles

Woodside delays Browse FLNG development schedule

12/17/2014 Woodside Petroleum Ltd. has reported it expects to enter front-end engineering and design phase for the proposed Browse floating LNG (FLNG) develop...

Woodside to buy Apache’s interests in Wheatstone, Kitimat LNG for $2.75 billion

12/15/2014 Woodside Petroleum Ltd. has agreed to acquire interest in the Wheatstone LNG and Kitimat LNG projects, respectively in Western Australia and Britis...

Watching Government: Russia: On the ropes?

12/15/2014 Russia's Dec. 1 cancellation of its South Stream natural gas pipeline was not surprising. European nations have signaled for years that they intend...

Canada Briefs


Kinder Morgan to deliver natural gas to Corpus Christi Liquefaction

12/11/2014 Kinder Morgan Inc. (KMI) companies Kinder Morgan Texas Pipeline, Kinder Morgan Tejas Pipeline, and Tennessee Gas Pipeline Co. (TGP) have entered in...

Magnolia LNG lets EPC contract to SK E&C USA

12/03/2014 Magnolia LNG LLC parent-company Liquefied Natural Gas Ltd. agreed to an engineering, procurement, and construction contract with SK E&C USA cov...

Pipeline leak dampens Atlantic LNG production

12/01/2014 Atlantic LNG (ALNG) reported a 35% reduction in LNG production because of insufficient natural gas supply from Trinidad and Tobago’s National Gas C...

Real-time monitoring improves LNG inventory measurement

12/01/2014 Kogas has improved the calculation method for determining stocks at its LNG terminals, changing from a sampling method to a real-time monitoring sy...

Watching Government: Greece and energy in Europe

11/24/2014 Amid growing energy supply geopolitics, Greece is a stable anchor within a rapidly destabilizing region, Yannis Maniatis, its Environment, Energy, ...

White Papers

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...

6 ways for Energy, Chemical and Oil and Gas Companies to Avert the Impending Workforce Crisis

As many as half of the skilled workers in energy, chemical and oil & gas industries are quickly he...
Sponsored by

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Available Webcasts

The Future of US Refining

When Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.


Oil & Gas Journal’s Forecast & Review/Worldwide Pipeline Construction 2015

When Fri, Jan 30, 2015

The  Forecast & Review/Worldwide Pipeline Construction 2015 Webcast will address Oil & Gas Journal’s outlooks for the oil market and pipeline construction in a year of turbulence. Based on two annual special reports, the webcast will be presented by OGJ Editor Bob Tippee and OGJ Managing Editor-Technology Chris Smith.
The Forecast & Review portion of the webcast will identify forces underlying the collapse in crude oil prices and assess prospects for changes essential to recovery—all in the context of geopolitical pressures buffeting the market.


On Demand

Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.


Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!


Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected