3-5-14 LNG Competition

Bill White and Office of the Federal Coordinator, under leadership of Larry Persily, provide a useful service to government and industry with scholarly essays on issues and facts related to disposition of Alaska North Slope Gas.  In this piece, White carefully analyzes various aspects of Alaska LNG competition. Please also see our 2-12-14 commentary on the same subject.  -dh

HOUSTON — Too many potential liquefied natural gas export projects are chasing the expected strong growth in Asian gas demand over the next 15 years, a consensus of speakers said at a recent LNG conference.

"There will be a lot of North American projects still waiting in 2030," predicted Daryl Houghton, LNG consulting manager with Poten & Partners, a global energy consultancy. LNG plant development has always gone through busts, booms and "projects waiting in the queue."

The LNG world has plenty of potential suppliers post-2020, agreed Robert D. Stibolt, senior managing director at Galway Group, an energy advisory firm with offices in Houston and Singapore. "It's just a question of who will come on and who will be deferred."

Houghton and Stibolt spoke at the Platts 13^th Annual Liquefied Natural Gas conference Feb. 20-21 in Houston. Conference topics ranged from the status of proposed North American export projects and their possible impact on global gas pricing to projected demand from different regions of the world.

But some of the key interplay among presenters during the two days sprang from a comment by the conference's first speaker:

Asia-Pacific annual LNG demand will grow by about 165 million to 175 million metric tons by 2025 — roughly double today's demand, said Asish Mohanty, senior analyst for global LNG research at Wood Mackenzie. That new demand — averaging about 23 billion cubic feet of natural gas a day — could require construction of a dozen or more new large-scale LNG export terminals over the next decade.

But Mohanty said new LNG projects under discussion — totaling 555 million metric tons per year in potential capacity — could fill that forecasted demand three times over. (He noted some are projects actually on the drawing boards and some are "projects" more at the dream stage.)

Some speakers who followed weighed in on the Wood Mackenzie forecast with their own outlooks.

Houghton of Poten & Partners said 370 mtpa in projects are vying to provide 130 mtpa in new LNG supply by 2030 that today's existing or under-construction plants can't meet.

Ed Ridzwan, assistant marketing director for Qatargas Operating Co., said an additional 155 mtpa of LNG capacity not yet sanctioned for construction must be built to meet forecasted demand for 2025. That is more than 20 bcf a day of new supply.

The proposed Alaska LNG project [3] — sponsored by ExxonMobil, BP, ConocoPhillips, TransCanada and the state of Alaska — would produce 15 to 18 mtpa.

Stibolt of Galway, speaking toward the conference's end, came in as voice of calm on whether an LNG supply glut looms for the 2020s. Projects that aren't needed won't be built, he said simply. Supply and demand will balance. That is the LNG industry's history. That will continue to be its story, he said.

Demand is tricky to predict, Stibolt noted. Variables include prices, coal- and nuclear-power plant retirements, and technology advances on both the supply and demand sides.

But Stibolt believes global LNG demand will be strong enough to support North American exports.

He didn't think a glut of U.S. exports, with prices tied to generally lower U.S. natural gas prices, would end the era of generally higher oil-linked LNG prices in Asia.  But Stibolt said the actual link — called a "slope" — in the oil-pricing formula would angle down to a lower level as both the U.S. Henry Hub index and United Kingdom's National Balancing Point index get incorporated into prices in some Asian contracts.

WILL LIQUIDITY MATTER?

Another factor in the 2020s could help ease high oil-linked prices. The decade likely will see new LNG supplies sail to market from the United States, Canada, Russia, East Africa, Australia and elsewhere. At the same time, consumption likely will be blossoming in such hungry economies as China, India, Singapore, Thailand, Indonesia, Malaysia, the Middle East and South America.

With more suppliers and more buyers in the 2020s, the gas market will have more options for its players, or as economists say: More liquidity. That should result in lower prices, Stibolt said.

Two days before the Platts conference began, a Houston-based economist at Rice University's Baker Institute for Public Policy issued a paper that made just that point.

"As the U.S. begins to export LNG, the global market will deepen and become physically linked to the North American market, the most liquid natural gas market on the world," said Kenneth B. Medlock III in his paper "Natural Gas Price in Asia: What to Expect and What It Means [4]."

"As natural gas becomes an increasingly fungible commodity, which would be the case as the volume of global natural gas trade increases, the pricing paradigm of oil indexation will come under increasing pressure," he said.

Medlock noted change could happen surprisingly fast. "After all, the rise to current price levels in Asia relative to prices elsewhere happened in only six months, a fact often forgotten in the discussion about future pricing in Asia."

THE LOWER 48'S LURE

At the Platts conference, Kunio Nohata, executive officer and senior general manager of gas resources for Tokyo Gas, said the new LNG projects that could emerge in the 2020s would give his company a more diverse set of possible suppliers. That would meet an important strategic goal for Tokyo Gas. The new supply regions he named included Africa, Canada, the U.S. Lower 48 and Alaska.

Lower 48 purchases at prices tied to the Henry Hub — a South Louisiana junction of many gas trunklines — "is very interesting to Japanese buyers" because of the price-setting transparency there, Nohata said. Henry Hub pricing might not result in the lowest price in Japan, after adding liquefaction and cross-ocean shipping costs. But adding it to the pricing mix will help Japan toward its goal of establishing a transparent and liquid LNG market in Asia some day, he said.

Japanese buyers, Nohata said, also like that Lower 48 LNG purchases will be allowed to be delivered to any LNG receiving terminal — called destination flexibility. That is different from traditional LNG contracts that require cargoes to sail only between a given LNG plant and receiving terminal. Destination flexibility would allow buyers to manage their LNG portfolios better, with the goal of paying lower prices.

HOW DOES CANADA COMPETE?

Bill Gwozd, senior vice president of gas services for Calgary-based consultancy Ziff Energy, said 16 proposed projects that would export Canadian gas — 14 in British Columbia and two in Oregon — are competitive with U.S. Gulf Coast plants. The gas and liquefaction would cost more in Canada but that would be offset by a lower shipping cost because of the shorter distance to Asia, he said.

Canadian gas could get to Tokyo Bay for $10 per million Btu, he said. It's the lowest possible price, "the Walmart price," he said.

"These projects are economic." The gas reserves are ample. The technology to build seven or eight pipelines across mountains to the coast exists. "There's nothing to stop any project," Gwozd said.

Others speakers were less rah-rah about Canada.

Canadian gas will cost close to $12 to deliver to Asia, said Houghton of Poten & Partners. The pipelines will be challenging to build. The LNG plants in remote areas will be more expensive than Lower 48 plants, he said.

Mohanty of Wood Mackenzie said Canada has significant technological challenges along every step, from its tight-gas and shale-gas fields, to its pipelines (as long as 465 miles to the coast), to its LNG plants. On top of that it has First Nations issues to resolve with the British Columbia aboriginal communities. The Canadian projects will get built eventually, he said, but it's unclear when.

In addition, industry is reacting coolly to British Columbia's proposed new tax on LNG exports, which the government outlined two days before the Platts conference began. The tax would range up to 7 percent of net income after capital-cost recovery. The provincial parliament is expected to take it up this fall.

Mohanty said that among proposed projects that await final investment decisions to construct, only some in the Lower 48 and Russia seem likely to actually be producing LNG by 2020.

THE TIME IS NOW

The time is now for Lower 48 plants, he said.

Lots of upstream gas is available. Buyers are attracted to Henry Hub pricing and destination flexibility. In many cases, liquefaction trains would be add-ons to underused LNG import terminals, so the projects can be built relatively quickly. Labor supply to construct them likely is available. These plants are a good medium-term supply option for buyers.

But longer-term, it's harder to see the Lower 48 plants holding their advantages, Mohanty said.

Other projects could get built that are closer to Asia markets, including in Russia, Canada, Africa and possibly a second wave of construction in Australia. For now, Australia's reputation is tarnished by big cost-overruns and delays on the first wave: seven projects under construction today, he said.

Wood Mackenzie ranked each region relative to the others on political risk, market proximity and supply diversity for the 2020s. Canada scored good straight across. Australia scored good on political risk and market proximity but poorly on supply diversity. East Africa ranked good on supply diversity, but political risk challenges its projects — little to no supporting infrastructure and rudimentary government fiscal and regulatory regimes handicap development of a tremendous gas resource, Mohanty said.

Mohanty was skeptical of Alaska LNG's prospects for the 2020s. Challenges include building an 800-mile pipeline, and the state's fiscal regime is uncertain "despite recent activity," he said. Assembling a $45 billion to $65 billion project takes time, and the Alaska project is in competition with many other projects for a limited window of opportunity, not to mention the big price tag itself, he said.

"By the time the Alaska project is ready for the world, the world may not be ready for it," Mohanty said.

NORTH AMERICA VS. REST OF WORLD

Houghton of Poten & Partners thinks North America projects will get half of the new Asia demand through 2030 — or 65 mtpa of demand. That leaves a lot of projects on hold: The U.S. has 140 mtpa in projects proposed that could succeed and Canada 90 mtpa, he estimated.

The U.S. projects that are merely adding liquefaction trains to LNG import terminals have a 20 percent cost advantage over "greenfield" plants that must build the piers, storage tanks, utilities and other facilities from scratch, Houghton said.

The plants that are moving fastest through U.S. regulators — including the Sabine Pass, Lake Charles and Cameron projects in Louisiana and the Freeport project in Texas — already are approaching 65 mtpa in nameplate capacity, leaving room for just one or two more North American plants, he said.

Projects in the rest of the world will supply the other 65 mtpa in his forecast. Houghton thinks Russia is positioned well, as it can deliver LNG to Asia for about $11 per million Btu — roughly midway between his estimates for the Lower 48 and Canadian delivery.

New plants will bring new pricing to Asia LNG, but oil-linkage will remain a strong component of the price formula, Houghton said. Perhaps a hybrid will develop that will be weighted 80 percent to oil via the Japan customs-cleared crude price [7], or JCC, and 20 percent to Henry Hub, he said.

Will the gap between high Asia LNG prices and lower European and North American gas prices close?

"I don't think so," Houghton said. "Will it diminish? Yes."

Poten & Partners sees more hybrid formulas in price negotiations. Perhaps the LNG projects that succeed in the 2020s will be those most willing to accept new pricing methods, he said.

-By Bill White, Researcher/Writer for the OFC. [8] bwhite@arcticgas.gov [1]

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