OTC: LNG industry poised to double growth

Warren True
Chief Technology Editor-Pipelines/Gas Processing

HOUSTON, May 5 -- Pushed by solidly higher market prices and a rich but remote resource base, the world's LNG industry sits at a pivotal point in its young history. That was the message of a general session at last week's Offshore Technology Conference in Houston.

Traditional contract terms are changing with buyers demanding greater flexibility in volumes and delivery and with pricing in one region becoming more closely related to and affecting other markets. Traditional supply and demand relationships are breaking up as LNG consumption in North America and Europe has begun to drive supply projects at greater distances to commit resources to larger-capacity liquefaction plants.

All participants in the session agreed on the critical role of markets in North America and Europe in driving the growth in LNG demand. Steve J. Lowden of Marathon Oil Corp. noted that the projected supply-demand gap in the US equals the entire supply for Japan, currently the world's largest importer of LNG.

Changes and drivers
Rodney Schmidt, managing director in charge of the gas and power group at PFC Energy, said that in terms of global supply and demand, an abundant and increasing body of "discovered and unutilized gas" is pressuring companies that have this gas in their portfolios to move it as those companies continue to build up their reserve bases.
But "they wouldn't do that without demand." Increasing gas use throughout the world, especially for electric-power generation, is playing a great part in both developed and developing markets, he said. In addition, liberalization is opening many markets, most importantly in Europe, fueling demand for gas.

The "very important need and call on LNG," he said, however, is in North America. Traditional supply basins there are "mature, and demand has caught up with supply potential."
Moreover, demand exists on both North American coasts with important implications for supplies from both the Pacific Basin and the Atlantic Basin. This prospect raises fundamental questions about how to get LNG into this market, how many terminals will be needed and where will they be sited, and, finally, what will be the effect on natural gas prices locally and on LNG prices worldwide, he said.

Traditional long-term contracts, said Schmidt, are "bulletproof." But we are seeing terms in newer contracts changing: Buyers are asking for and getting greater flexibility in volume offtake "either in commitment or in timing and structure of terms."
He said pricing structures are under pressure as well, especially from "indexation": Rather than its traditional price indexing to crude oil, LNG is more often now being indexed to natural gas pricing in such places as the US Henry Hub as LNG penetrates further into Europe and North America.

Suppliers are competing to place their gas and building strategies around particular markets. Overall, Schmidt notes that the LNG industry and its related businesses "are changing fundamentally. Some companies are trying to enter markets they have never before served and exposing their balance sheets to new capital risks for bigger projects to move LNG."

And he pointed that in 2001-10, among only the five "supermajors," more than $50 billion has been committed to move LNG.

And, finally, Schmidt noted that another factor that will affect price and volume movements in this time period is that many long-term contracts for Asia-Pacific-based LNG supplies will come up for renewal and could profoundly affect planned new and expanded capacity as well as amounts to be recontracted in 2010-15.

Growth history
What attracts BP PLC to the LNG business, said Douglas M. Rotenberg, president of BP Global LNG, is its consistent annual growth, especially when compared with other commodities in the industry.

"In this business," he said, while "[demand for] oil has grown at 0-2%[/year and] natural gas at 2-3%[/year], LNG shows a track growth of 7%[/year] and no signs of diminishing that growth.
"That's a fantastic pace [to entice companies to enter], and for players who are already there to play it bigger and harder." In 2003-04, that track record "of growth, profit, and safety" makes it an "interesting place for companies like BP to be."

Rotenberg asked the audience to remember only 10 years ago, 1993-94, when LNG was a niche market.
"Asian suppliers were going to Asian markets, Algerian supplies were going west of [the] Suez [Canal], with a little to the US and rest going to Europe," he said. The US Henry Hub price was at $1.50/Mcf and even down to less than $1/Mcf. "These were terrible macroeconomics for industry," he said, "but LNG was still growing at 7%[/year]."

And he said that, despite the perception of great financial risk, "projects in the Middle East and Asia continued to be developed in the mid and late 1990s."

The great change in this marketplace in 1993-2003, he said, was the perception of the need for this fuel.
Fundamental shifts in energy have occurred in three or four key countries, some of which already had "massive gas infrastructures that are very easy to tweak and accept large LNG imports.

"A huge prize was fought for and won between the cost of the gas in any resource country and the market value of that gas to the supplier," said Rotenberg.

But, he said, "What risks are the players in the LNG value chain¿the resource holders, integrated company, shippers, terminals, and customers¿willing to take to capture a disproportionate share" of the markets?

In the US, he said, where there is the "biggest call on gas," you encounter "all sorts of circular arguments: If gas prices reach $6[/Mcf], will demand be destroyed, and therefore we won't need it? Will it stay at $3.50 or $4[/Mcf] or some sort of happy medium price, and therefore we're likely to need this [supply] and a lot more? Nobody knows."

Rotenberg further said that the fundamental structures of the markets in the US, UK, China, India, and many of the countries are strongly underpinning demand for LNG.
By 2010, he said responding to a question, there will be "more of the same." Rotenberg called special attention to Qatar, which is ramping up a "massive growth plan."
At acceptable price levels, Qatari plants "are accessible to every single market in the world.
In a quirk of geography, Qatar is equidistant from [the LNG terminal at] Lake Charles, La., and the US West Coast, assuming $3.50[/Mcf]" pricing, he said.

The US, according to Rotenberg, will likely build six new regasification terminals, and perhaps as many as eight. And he noted the important expansions under way in Trinidad and Angola as sources for Atlantic Basin LNG. But, being from BP, he also called attention to Egypt, where LNG plans in 1999 were "a whisper" that will grow by 2006 to about 12 million tonnes/year of capacity.

Rotenberg also pointed out that the cost of LNG production and the cost of terminal and market access is roughly equal. He said that the main difference—and what poses the most significant risk in any project—is shipping. A train in Trinidad of, for example, 3-5 million tonnes/year requires two to three vessels/year to move LNG to the US. Qatar, on the other hand and assuming a similar sized train, would require 10-12 vessels.

But for Rotenberg and BP, the key value in the LNG train is upstream—in the resource, the gas. Using a gambling metaphor, he said the "molecules are in the house."
Focusing on the resource, he said, reduces the risk should one of the four or five elements in the LNG chain get out of balance.