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

PHMSA proposes pipeline accident notification regulations

07/02/2015 The US Pipeline and Hazardous Materials Safety Administration has proposed new federal oil and gas pipeline accident and notification regulations. ...

Quicksilver Canada gets LNG export approval

07/02/2015 Quicksilver Resources Canada Inc. has received approval from the National Energy Board of Canada to export 20 million tonnes/year of LNG from a pos...

Origin lets contract for Otway basin fields

07/02/2015 Origin Energy Ltd., Sydney, has let a $1.3 million (Aus.) contract to Wood Group Kenny for provision of a detailed engineering design for the onsho...

API to issue recommended practice to address pipeline safety

07/01/2015 The American Petroleum Institute expects to issue a new recommended practice in another few weeks that addresses pipeline safety issues, but the tr...

Shell Midstream Partners takes interest in Poseidon oil pipeline

07/01/2015 Shell Midstream Partners LP has completed its acquisition of 36% equity interest in Poseidon Oil Pipeline Co. LLC from Equilon Enterprises LLC, a s...

Shell makes FID on Appomattox deepwater development in Gulf of Mexico

07/01/2015 Royal Dutch Shell PLC has taken a final investment decision (FID) on the Appomattox deepwater development, authorizing construction and installatio...

Woodside-led Browse FLNG venture enters FEED phase

07/01/2015 The Woodside Petroleum Ltd.-led Browse LNG joint venture has entered the front-end engineering and design phase for a floating LNG (FLNG) developme...

Case for Keystone XL has grown stronger, TransCanada tells Kerry

06/30/2015 Canada is taking strong steps toward combating climate change, and the proposed Keystone XL pipeline crude oil pipeline remains in the US national ...

Lytle named to Canada’s National Energy Board


Murray Lytle has been appointed as a full-time member of Canada’s National Energy Board for a term of 7 years, effective July 6.

White Papers

Definitive Guide to Cybersecurity for the Oil & Gas Industry

In the Oil and Gas industry, there is no single adversary and no single threat to the information tech...

UAS Integration for Infrastructure: More than Just Flying

Oil and gas companies recognize the benefits that the use of drones or unmanned aerial systems (UAS) c...

Solutions to Financial Distress Resulting from a Weak Oil and Gas Price Environment

The oil and gas industry is in the midst of a prolonged worldwide downturn in commodity prices. While ...
Sponsored by

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by
Available Webcasts

Operating a Sustainable Oil & Gas Supply Chain in North America

When Tue, Oct 20, 2015

Short lead times and unpredictable conditions in the Oil & Gas industry can create costly challenges in supply chains. By implementing a LEAN culture of continuous improvement you can eliminate waste, increase productivity and gain end-to-end visibility leading to a sustainable and well-oiled supply chain.

Please join us for this webcast sponsored by Ryder System, Inc.


On Demand

Leveraging technology to improve safety & reliability

Tue, Sep 22, 2015

Attend this informative webinar to learn more about how to leverage technology to meet the new OSHA standards and protect your employees from the hazards of arc flash explosions.


The Resilient Oilfield in the Internet of Things World

Tue, Sep 22, 2015

As we hear about the hype surrounding the Internet of Things, the oil and gas industry is questioning what is different than what is already being done. What is new?  Using sensors and connecting devices is nothing new to our mode of business and in many ways the industry exemplifies many principles of an industrial internet of things. How does the Internet of Things impact the oil and gas industry?

Prolific instrumentation and automation digitized the industry and has changed the approach to business models calling for a systems led approach.  Resilient Systems have the ability to adapt to changing circumstances while maintaining their central purpose.  A resilient system, such as Maximo, allows an asset intensive organization to leverage connected devices by merging real-time asset information with other critical asset information and using that information to create a more agile organization.  

Join this webcast, sponsored by IBM, to learn how about Internet of Things capabilities and resilient systems are impacting the landscape of the oil and gas industry.


Taking the Headache out of Fuel License and Exemption Certificates: How to Ensure Compliance

Tue, Aug 25, 2015

This webinar, brought to you by Avalara, will detail the challenges of tax document management, as well as recommend solutions for fuel suppliers. You will learn:

-    Why it’s critical to track business partner licenses and exemption documents
-    The four key business challenges of ensuring tax compliance through document management
-    Best practice business processes to minimize exposure to tax errors


Emerson Micro Motion Videos

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