By an OGJ correspondent
PARIS, Oct. 14 -- New LNG supply chains are set to develop worldwide, under the pressure of strong European demand. But projects already decided or currently being negotiated in the Atlantic Basin aim simultaneously at Europe and the US. This is accelerating the trend towards globalization of a market that until recently was segmented into three separate regions: Asia, Europe, and the Americas.
Such was the general view emerging from the 7th Gas Executives' Summit Conference in Paris Oct. 10-11, organized by Institut Français du Pétrole, the consultants SPTEC, and consultant and publisher Pétrostratégies.
Structural changes
In his opening remarks, conference Chairman Nordine Aït-Laoussine, president of Geneva-based consulting group Nalcosa, pointed to the new worldwide trade outlook of a product that "has seen spectacular growth over the past few years and which now accounts for over a quarter of natural gas trade."
He also noted that the "deep mutations which are taking place in the contractual framework of LNG transactions are leading towards a convergence of the American, European, and Asian markets and towards the less-rigid contractual model of long-term, take-or-pay contracts. A more fluid and more volatile market could emerge along the lines of the oil market."
Viewing the LNG transactions recently concluded, Nordine Aït-Laoussine opened up what turned out to be one of the most controversial subjects at the conference.
"It really seems, he said, "that a new type of trading, dominated by short-term vision, is taking shape and gaining ground to the detriment of traditional contracts. With the multiplication of spot sales, a more frequent resort to futures, the correlative reduction of long-term contracts, the attenuation of take-or-pay clauses, and the revision of indexation formulas, one notes a slow erosion of the influence of producers on the price of gas and a progressive transfer of the upstream commercial risk."
ENI SPA's deputy director-general for gas and power, Domenico Dispenza, said that "potential buyers are asking for partial indexation of gas price to electricity, and the ability to provide such indexation becomes an important part of any commercial offer."
However, Simon Bonini, president of BG PLC unit British Gas LNG, Simon Bonini, insisted that globalization of LNG "does not imply commoditization," for the LNG market has few producers, few buyers, and is specialized and highly capital-intensive. He conceded, however, that there is "room for traded commodity at the margin," as the Atlantic Basin emerges as a trade market, and the market is driven by transportation and market efficiencies."
Bonini also said that "reliability, safety, and longevity are our key values; trading is an important development for all of us, but the bread and butter for importers and exporters is unchanged. We just seem to have the potential for a little jam with that bread."
Conversely, Jean-Pierre Hansen, chairman and CEO of Tractebel SA, reflected the views of many participants, remarking, "Spot contracts are incresingly complementary to long-term contracts pulled along by hubs which provide additional possibilities for gas marketing.
"They help smooth out supply-demand imbalances and thus contribute to control of take-or-pay risks" as well as furnishing a source of price transparency (provided there is sufficient liquidity).
"They are a risk-management tool" he pointed out.
EU liberalization role
The gradual liberalization of the European Union's gas and electricity markets "driving deregulation and pushing back state involvement in favor of the private sector," in the words of BP PLC's Group Vice-Pres. Steven K. Welch, boosts spot transactions that introduce flexibility in long-term contracts.
Overlooking the destination clause, which, in Algerian and Russian long-term contracts, bans the resale by the buyer of spare gas capacity, is also a short-term way of minimizing take-or-pay risks.
Indeed, Jose Luis Lopez de Silanes Busto, CEO of Spain's Gas Natural, believes that some flexibility will be introduced in new long-term contracts regarding the destination clause "essential in a more movable market" and that these long-term contracts might be reduced to 10, for "20-25 years is too long."
One aspect of these changes worries Sonatrach Vice-Pres. Ali Hached, who reminded the conference participants that "these arrangements were introduced by the parties (to a long-term contract) to take into account a balance based on the risk-sharing concept and to reflect the reality and diversity of the European gas markets."
Hached argued that scrapping these arrangements and widely introducing a spot system beyond the problem of availability and supply cuts would mean "introducing the wolf into the sheep's fold."
Nevertheless, the trend toward growth and globalization of the LNG business is opening up greater market competition in terms of supply by increasing the number of suppliers and generating arbitrage opportunities both for producers and traders, ". . .so that," pointed out Jean-Marie Daugier, senior executive vice-president of Gaz de France, "control of delivery points becomes very much at stake in contract negotiations.
"It generates competition for gas between former disconnected areas but also hardens competition between LNG suppliers."
Market outlook
Increased natural gas demand in Western Europe, set to reach 25% of the region's energy mix at a level of 130 billion cu m in 2010, coupled with depleting indigenous resources, that has been driving much of the LNG development.
Also central to this expansion is the fall in costs throughout the LNG supply chain. Many speakers pointed to the fact that costs have come down by 50% throughout the chain over the last few years and, driven by new technology such as gasification aboard methane carriers, should fall by a further 25-35% over the next 5-7 years. Speakers noted that individual LNG train costs have fallen to $200 million from $400 million and that LNG transportation costs have dropped to $1,200/tonne from $1,900/tonne.
Trade patterns
In addition to bringing added supply safety and diversity by supplementing continental Europe's traditional suppliers Russia, Algeria, and Norway, natural gas is now able to move from Norway to the US and from southern Europe to northwestern Europe as markets interlink.
Daugier gave examples of newly signed LNG contracts:
-- In addition to its LNG from Algeria and Libya, Spain receives LNG from Trinidad and Tobago and Qatar. It will receive further supplies from Trinidad and Tobago, Nigeria, Norway's Snøhvit, and Egypt.
-- Italy, also supplied by Algeria and Libya, will receive new supplies from Qatar.
-- France will complement its LNG from Algeria and Nigeria with LNG from Egypt and Norway.
In addition to these contracted supplies, a number of projects are being studied or planned, for instance LNG from Oman to Spain, to Europe, LNG from Qatar to the UK. At a less advanced stage is LNG from Angola, from Venezuela, and from the Shtokman project in Russia's Barents Sea.
In addition, the majority of LNG projects currently supplying Europe also supply other major consuming regions. However, the volume between regions in 2001 was relatively low: around 8.5 billion cu m, or about 6% of world LNG trade.
But projects already decided, or currently being negotiated, that center on the Atlantic Basin are aimed both at Europe and the US: plant expansions in Nigeria and Trinidad and Tobago and new projects in Venezuela and Angola.
Arbitrage opportunities
Daugier points out that LNG globalization will boost arbitrage possibilities between both European and American markets and between European and Asian markets.
In addition, buyers and sellers can also take advantage of economic opportunities. To ensure maximum advantage, purchase and sales contracts must contain the necessary flexibility in terms of the final destination for the LNG.
Interregional competition is also developing for LNG buyers, as the majority of suppliers for the European market are also able to target the American and Asian markets. Suppliers are also affected, as European buyers can now turn to new LNG sources.
Daugier, along with a number of other speakers at the summit, said he believes that globalization will still be based on long-term contracts, while spot and short-term arbitration between major markets will also increase.
BP's Welch said he considers that "the successful LNG player will work to create a bridge in what is effectively a transition phase from a long-term to a shorter-term commercial model for gas supply. . .. And it is in the Atlantic Basin that the commercial framework has developed to encompass a far more innovative approach that will underpin ever-closer linkage between the energy markets of North America and Europe—and between LNG suppliers and customers."
Groups with positions throughout the chain are emerging as LNG merchants. One of them is BG, with Bonini assuring that "the US market is the key—it sustains global LNG liquidity."
While the commercial aspect of the LNG market is promising, it will need to rely on much new infrastructure to handle the growing volumes traded. Investments of $300 billion are considered an understatement.
Participants at the conference could not fail to wonder where the money would come from, noting that not all projects can be financed with equity and that the crisis of the financial markets has badly hit energy markets. Those who are managing are the integrated companies or the pure players.
"So," wondered one speaker, "who profits from the gas-electricity integration, as the financial markets recognize only the pure players?"
