Uncertainty was the hallmark of the 13th International Gas Summit in Paris Oct. 22-23, reflecting the current world financial turmoil and looming economic slowdown. Speakers felt unable to predict short or medium-term natural gas developments and were more at ease with long-term projections.
Summit Pres. Nordine Ait-Laoussine, president of Geneva-based consulting group Nalcosa, set the tone in his introductory remarks: “We are all apprehensive of the potential consequences of the ongoing global turmoil for the natural gas industry…we do not know the answers to some critical questions:
- ‘How deep will the recession be?’
- ‘How long will it last?’
- ‘Will this turn out to be the most severe crisis the world has ever faced…or will it be short-lived if proper remedies are agreed upon and implemented quickly?’
- ‘Will some regions or industries escape relatively unscathed?’”
He added, “It would appear inevitable that the gas industry will be affected, perhaps in a profound way.”
Supply security
The “security of supply” issue came in for a new analysis. Moderator Claude Mandil, former International Energy Agency executive director and author of a report on supply security released in May to the French government, quickly noted that “recession reduces tensions on capacities and will create obstacles to investments, with possibly lasting consequences.”
GDF Suez global gas and LNG Vice-Pres. Jean-Marie Dauger said, “Certainties have been jostled. The short-term was comfortable; we are not comfortable now in any horizon, so it is easier to talk of the long-term.” Although fundamentals such as demography, emerging economies, and Europe’s long-term gas market growth remain, he said, “Uncertainty is on the demand level and the short-term availability.”
In the current changing environment and volatile market, Daugier said, market risks could be reduced and demand-supply security bolstered through “downstream interpenetration” of producers in consumer countries.
Eni Senior Vice-Pres. for gas and power Camillo Michele Gloria agreed, also suggesting that producing countries become involved in their clients’ downstream businesses. The problem, he pointed out, was “government mistrust,” but he said the crisis could “bring good news with it.”
He added: “We have before us an environment opportunity to think of cooperation as a good way to long-term access to resources. Security will need strong cooperation between producers and buyers,” he said. “Gas importers must be engaged in wide-ranging win-win deals well beyond the buyer-seller paradigm.”
Phlippe Boisseau, Total’s president of gas and power, agreed that the crisis would have an impact on demand but remained bullish about long-term prospects. He was optimistic that “LNG projects decided today will come on stream in 2020” and that they must be started now.
Total intends to pursue a strong investment policy. If investments proceed, he said, there will be no supply problems after the 2013 bubble everyone is expecting. LNG’s flexibility as well as the diversity of supply sources are strong reasons to pursue investments.
Future LNG challenges
For Sonatrach, the constraint is not access to markets but securing development of “adequate liquefaction capacities,” explained Nabila Metref, pipe gas and LNG exports director. There are many projects planned, she said, but few under construction.
“Suppliers are implementing new development schemes that take into account the reality of each market and [that] preserve security of demand,” she said. “This includes downstream positions through dedicated [long-term] affiliates.”
Viewing LNG growth with its “long-term promising future,” Royal Dutch Shell’s general manager for global energy strategy and portfolio development, Jacqueline Redmond, also saw as one of the future challenges “the below-average final investment decisions” in 2006-07 “and none taken in 2008,” due, in part, to escalating costs and engineering, procurement, and construction (EPC) constraints.
Utility Electricite de France says the problem is the volatility of gas prices in Europe, making it hard for electricity producers to choose a technology and increasing the risks taken by producers. It strongly favors a “robust gas price index,” which, it suggested, could be in euros.
For the index to emerge, efficient access to transit capacities and to efficient flexibility tools would be required together with utility-producer partnerships where project opportunities and risks are shared. A gas price index in Europe, where both piped gas and strongly growing LNG markets coexist, would contribute to stabilizing both spot and long-term gas contracts it said.
Financing gas projects
The crucial question about financing projects in the current financial turmoil received no comforting answer.
Jerome Halbout, a partner in Paris-based 4D Global Energy Advisers, said funding sources were particularly sensitive to the financial markets crisis in a softening economy “where oil was a refuge for liquidity and with no improvement in sight in the price deck.”
Pinpointing the impact on upstream companies Halbout said, “Frontier E&P will suffer the most.
Majors, national oil companies (NOCs), successful independents, and recently financed projects–all with sufficient operational cash flow needed to fund their capital expenditure commitments–would be the survivors as funding commitments from banks evaporate until 2009, with the capital markets essentially closed.”
Projects not properly financed before the funding crunch will be abandoned–or postponed if the promoter is sufficiently financed to resist the credit squeeze, he said. If not, nonconventional, frontier, or stranded reserves will be canceled.
The pressure on EPC contractors will slacken, but they will have more work in Asia and producing countries, Halbout said.
Concerning the financing of LNG projects, banking group Societe Generale’s director of energy project finance Katan Hirachand was more bullish as he expected the market situation to be restored in the short-to-medium term.
“LNG is very favored by banks,” he added. Nonetheless, “multi-sourced financings will be the key to maximizing leverage and will need reconciliation of different lenders and their objectives,” he said. Strong sponsors with support from governments and with a good history will also be needed, he said, and the intervention of NOCs would provide “more comfort.”
Within the LNG sectors, he was specially encouraging about “floating LNG,” for it is “redeployable, faster to market, had a reduced environmental and social impact, and enjoyed a lower potential unit cost. “However,” he cautioned, “some innovation will be needed to make floating LNG bankable.”
Some good news
One area where the current crisis has yielded good news for the gas industry is the change in the European Commission’s strong bias for short-term gas purchasing contracts versus long time ones.
“The long term view is being rehabilitated,” noted Michel Guenaire, partner at the law firm Gide Loyrette Nouel, who was involved in a number of disputes caused by the commission’s short-term bias.
The need by buyers for supply security “is likely to mark a return to long-term contracts,” Guenaire said. “The commission focused on short-term contracts as a way to open up the [European Union] gas market and make it more fluid,” he explained. While the commission did not forbid such contracts, a supplier could be sanctioned if advantage was taken of a dominant position.
The gas market, Guenaire pointed out, is still 90% involved in long-term, take-or-pay supply contracts. Many were signed when the buyers were still monopolies and the contracts often are renewed before falling due. Their acceptance in markets now open to competition will combine both supply safety and the guarantee of price competitivity.
The fact that gas prices can be hitched to the spot market or forward price of gas or on electricity prices justifies the maintenance of long-term gas contracts in an open competitive market, Guenaire said, along with the growing recourse to the gas release system where an operator enjoying a dominant position can sell gas by auction to a competing operator.
The annual summit was organized by Institut Francais du Petrole and consultant-publisher Petrostrategies.