US LNG will 'Shake up the Market'

Cheniere Energy's vice-president for strategy Andrew Walker told the European Gas Conference in Vienna January 19 that LNG from the US would change the global industry dynamic in many ways in the next five years.

Deliveries are due to start up in February or March from Sabine Pass, Cheniere Energy’s LNG export terminal in Louisiana. Overall US capacity is set to reach 60mn metric tons/yr from 14 plants, which compares with global trade today of 240mn mt/yr.

That means abundant, cost-competitive supply coming onstream during the next five years, which will stimulate new demand and new markets, he said.

The US, Qatar and Australia will be, he said, the “Big Three” global LNG suppliers – previously only Qatar, on 70mn mt/yr had deserved the epithet “big”. Between them, US, Qatar and Australia will represent just under 50% of total supply at that time.

Beyond that increase in capacity, Walker reported that consultants Wood Mackenzie expect global demand for LNG to continue to grow. “And you will see a need for new supply post-2020.”

However, things could look different if the LNG industry saw a dearth of final investment decisions in the next few years, he conceded, perhaps even seeing a new boom-bust cycle – something neither the suppliers nor the buyers would like to see. Buyers “want low prices, clearly,” he said. “They also want some stability in the industry. They're looking for a fuel that has a steady supply rather than 'boom-bust' characteristics.”

Breaking down barriers

Walker said it is much more difficult to tie down the demand side of the industry, particularly to assess demand elasticities for new markets. “I think we're going to see the US – because of its abundance, flexibility, availability, breaking down barriers to entry, barriers to access, volumes – start to spur a lot of new markets over the next 5 years or so,” he said.

Floating storage, regasification unit technology, he said, will help facilitate that. He said, “I think we are going to enter a period where it's never been easier to access cost-competitive LNG, never easier to put the technology in place to import it.”

According to Walker, the industry may be underestimating that potential as it looks forward from the current despondent atmosphere at present.

He said the US will also change the way LNG is bought and sold and traded in the industry, explaining: “It's creating flexible supply, destination-free flexible volumes, and I think the impact of that in a low price environment is going to be rationalization. We're going to see more swaps, more people working together to reduce costs, to rationalize the trade. It's something the industry hasn't naturally done over time. “Nothing spurs you to do that like a low-price environment,” he commented.

Increasing liquidity on the global LNG market, he said, was evident via changes like more tenders happening, more trade taking place. According to him, the US LNG will add more liquidity to the evolving market place. “And I think we're going to see more buyers, more sellers, and more of buyers and sellers reselling LNG. It's going to be a higher churn.”

Commoditising LNG?

The next five years would bring an evolution of the LNG industry, according to Walker, who said it is headed in the direction of being a “more commodity-like fuel”.

Liquidity and price transparency, he said, will result in the formation of an FOB hub, possibly in the Gulf of Mexico, as well as LNG hubs in Asia. The US is important, he said, because it has a lot of latent potential supply in the mix of potential projects, setting a “price point” that is hard to ignore.

“If you're an expensive, high-cost project you're looking at competing with a range of transparently-priced US projects, that sets a problem for you,” he said. If mid-scale LNG can happen, it is likely in the innovative environment of the US, he said. “The US creates a more resilient, more responsive and less volatile trade system.”

As for the impact that would have on Europe, he showed a “wave of LNG” coming to Europe in his presentation. With Europe's capacity being used at around a quarter of its potential, he contended that Europe will be able to ride the wave. “If LNG trebles from the current 35mn mt/yr to 100mn mt/yr, that will mean that this capacity is still not fully utilized, but not all capacities or markets are equal.”

He pointed out that the LNG markets of Spain and the UK, or Poland and Lithuania have little in common with each other. “As capacity gets increasingly full, we start to see tensions in the system in terms of access to capacity and how that LNG is able to enter the system.”

How much LNG is coming to Europe and how quickly? Walker reported that some were raising their estimates, possibly indicating pessimism regarding demand for LNG in Asia, but it also shows that LNG works in Europe in the long-term on a pricing basis. This required, he said, looking beyond the current “supply-push cycle” – how low the prices go, and how the market will balance.

Dangerous volatility: Ledesma

Meanwhile, in his introduction to the LNG Focus Day session at the European Gas Conference, the Oxford Institute for Energy Studies' David Ledesma offered some numbers to illustrate the challenging environment faced by the natural gas industry.

For one, the Henry Hub price, he noted, is presently $2.10/mn Btu. “Last year, it was $3.10, and 2 years ago it was $4.30 – so it's halved in the last 24 months.” He offered similar illustrations with looks back on the UK hub, the National Balancing Point; and for the Brent crude oil price.

The numbers, he explained, show the environment that the industry is operating in: huge volatility. “Everybody's got to change their game; if they don't, they're going to get left behind.”

For many, said Ledesma, LNG is like a “rabbit staring into the headlights of a car coming towards us. We don't know what to do, and are having to think through new strategies, with increased supply, weak demand. New markets are the saviour – but what are those new markets?” He questioned how robust existing gas purchase contracts were. 

Drew Leifheit reporting from Vienna; edited by William Powell