[Premium] US Export Capacity will Lag Supply: Souki
In a panel discussion entitled “US Energy Markets in Transition” at the 2018 Columbia Global Energy Summit April 19, members of the panel offered their insights on how the next chapter of the American natural gas story might unfold.
Tellurian's board chairman Charif Souki was asked whether the infrastructure can be built quickly enough for what's coming online, particularly with LNG and projects emerging in other parts of the world.
“No,” he said, explaining it takes time to build an LNG facility and takes time to get the gas to that facility. “This is not instant gratification,” he said. “You have to plan it, permit it and build it. It takes about 6-7 years to finish.”
Two additional complications he cited are an unworkable business model, “because the market has become significantly liquid that as with all commodities you don't really need to enter into contracts – you know that the commodity is there. If you're a buyer you're going to say 'I need it three months a year during winter for peak demand – why do I have to enter an infrastructure or enter a long-term contract?'”
Second, Souki said there is a geopolitical risk of who gets along with whom. “So when you put the business model problem on top of the geopolitical problem, nothing happens immediately,” he added.
Finance concerns
Souki said the last thing he was worried about is the availability of capital to fund infrastructure projects, but "having the ability to access the capital at a reasonable price is a different story,” he added. For foreign investors, he explained, these deals are not based on a simple profit motive, but upon various considerations.
“You shift your risk-rewards expectation – so, you want to be the low cost provider because you're now in a commodity business. However, if you're the low cost provider, you can go through the cycles and survive the bad times but make a lot of money in the good times. You have to accept that you're going to be on a different risk-reward profile, but I don't think there's a shortage of capital – there's capital everywhere in the world, and some of it wants simply to secure cheap natural gas,” said Souki, who explained that the benefits were derived in other ways than simple profitable returns.
Growth expectations, perceptible change
Pioneer Natural Resources Chairman Scott Sheffield also expressed his concerns over whether the US bears enough LNG export capacity to be able to deliver American exports. He said, “I'm worried about the next round of LNG projects that haven't been approved: we could be producing way too much gas in the Permian, Marcellus and Utica (shale basins).” Still, he reported that the US is exporting 2.3mn barrels of oil/day, which he said is a record.
As the Permian basin has the right geology and the companies are in place to produce, Sheffield said the basin would be producing 75%-80% of the US growth over the next several years.
IHS-Markit vice chairman Dan Yergin concurred that the US energy business is likely to see substantial growth in the next several years. “We are seeing two kinds of constraints: one is the infrastructure constraints – the scale, and, secondly, the demands of shareholders for returns as well as growth.”
Up until just about a year ago, he continued, the rest of the oil world had seen American exports as a disruptive thing, but now they are being seen as part of the global market – a perceptible change.