03 May Five key take aways from LNG18
The LNG 18 Conference has come and gone, and with it the delegates, booths, journalists and industry executives. The content will live on in the 100mb of zipped presentations and papers available for download, but if you haven’t the time nor the energy to wade through it all, here are my five key take aways from the sessions.
One. Cautious optimism
To be frank this was my first of this particular global conference. The previous one, LNG17 in Houston, was described as an exuberant orgy of optimism, with lots of deals being done, thousands of attendees, a huge trade show floor, and heaps of brash US projects loudly thumping their chests for attention.
This show was not that. It was more subdued, with fewer people and fewer gas buyers looking for deals and potential projects looking for funding. I was mildly surprised that some of the big Australian gas projects, particularly those from Queensland, had limited presence, but as they don’t need customers and they are not in a buying kind of mood, perhaps that was to be expected.
Nevertheless, presenter after presenter argued convincingly that the demand for gas in the future was a very strong bet, aided by China’s desire to clean its air, COP21 commitments to reduce GHG, and the shortcomings of just about every other fuel (renewables, nuclear, oil, coal). Sure, there’s this short term challenge as lumpy new production (one new 4 million ton LNG train enters production every month for the next 2 years), meets a smoothly rising demand curve.
We’re not going to see any big greenfield projects for years (not before 2020, would be the consensus). But we will see an in-determinant number of small floating storage and regasification vessels (or FSRUs) purchased and moored in harbors all up and down the China coastline, opening up many 2nd and 3rd tier cities, and in more mass market countries like Pakistan, Bangladesh, India and parts of Europe. So, a long term bright future with short term pain. Maybe not sunglasses bright, but still pretty bright.
Two. The customer has spoken
LNG is an odd market, when you think about it. Few sellers and few buyers building and investing in these impossibly large energy distribution systems, all tied together with iron-clad long term contracts. But at LNG18, the strains of this business model were on clear display.
The huge boom in short term supply from all the new projects, in the face of flat demand from the buyers, the competitiveness of coal and renewables, and the high cost of oil indexed pricing, is pushing the customer base to demand far more flexibility.
Customers need more flexibility from the suppliers in the form of shorter duration contracts, different pricing models, relaxation of shipping limits. Many of the speakers from buying nations (Japan, Indonesia, Korea) stressed their goal of obtaining more flexibility from their suppliers.
Three. The builders are sheepish
There was a palpable amount of comeuppance meted out to the builders of the current round of projects. Construction productivity in the general infrastructure world has improved some 40% in the past 5 years, whereas in the oil and gas sector it has declined 20%. Costs clearly ran away on the recent round of projects, reinforcing the perception that gas is an elite fuel and slowing demand growth, whereas the industry clearly needs gas to become much more mass market.
Boosting the level of collaboration and cooperation among the builders is now a significant clarion call, with one senior LNG executive on a panel discussion with his peers saying that they need to put aside egos, stop building monuments to themselves and get on with collaboration. Wow.
Even suppliers got in on the act, with commentary on what constitutes best practice in contract management, from their vantage point.
And no one was boasting about on time this and under budget that, although the extraordinary safety record of the industry is very impressive. It might not feel that way with all the noise and kerfuffle from the anti hydrocarbon movement, but the industry does a pretty decent job meeting its health and safety commitments.
Four. Oil indexed pricing is fading fast
New pricing models are on the way. This is driven by the impending arrival of US LNG with its hub pricing construct (Henry Hub market clearing price is getting baked into hybrid pricing models), and by the eagerness of Singapore to put a hub in place (perhaps in some competition with Shanghai and Tokyo). The conference concluded that the writing is on the wall for the end of the dominance of oil indexed pricing.
And I say dominance because 70% of LNG is bought and sold on long contracts that are oil indexed. So oil indexed contracts are not going away, unless buyers and sellers agree to open the contracts up and renegotiate. And they might. One of the more engrossing bits of content was how to go about opening up an LNG contract for re-negotiations. There were two presentations on this front and it was completely on purpose.
Aside from using hubs to help with price formation, there wasn’t too much discussion about the many other ways that price could be built. Why not price using other fuels? Why not indexed to a power market price? How about tied to GDP, or to a return on assets employed, like a utility?
Spot LNG and short term markets are taking a greater and greater share of the total amount of LNG transactions. Today the industry estimates 28% of all LNG is either sold on spot or on some short term basis, and this is rising to 45% over the next 10 years. There’s no reason to think that spot LNG pricing will be oil indexed. Today spot prices are well below what an oil indexed price on a long contract would be.
Five. Technology is liberating supply and demand
I’ve written about some transformative technologies that should be coming to the LNG sector, but surprisingly few were on display on the trade show floor. There was a lonely drone display tucked away in a corner, but nothing on 3D printing, nanotechnology, revolutionary materials, or wearables. Two booths had some Virtual Reality headsets to play with, but frankly not overwhelming. Looks like we’ll have to wait another year or two.
The really cool technologies (and I mean cryogenic cool) were the supply chain inventions: the coming LNG vessels (Prelude) that will open up new stranded gas fields, the floating regas ships that will bring fuel to new markets, the bunkering vessels that will supply LNG for marine shipping, and the small scale LNG plants that will supply rail and trucking depots. These technologies promise to liberate new gas supplies, and unlock demand in the many smaller markets (ports, shipping, rail and trucking).
Technologies like these help the industry reach beyond the present business model (super sized gas fields supplying gigantic consumer markets or gas and power utilities). Unfortunately, it was all a bit academic because gas is uneconomic relative to liquid petroleum (diesel) and coal, but the opportunity was significant.
Japan and Korea, in particular, have profited from their need to import LNG by becoming very prominent in the heavy manufacturing of LNG kit. Booth after booth had displays of LNG cargo ships, production vessels for LNG and FLNG, the insulation for tanks and ship storage, piping and valves. It was obvious that the gas buyers have over the years linked their industrial and manufacturing policies to their energy import strategy.
It made me wonder how nations like Australia were going to extract as much or more value from their LNG industries in the same way that the Asian importers do. It might not be through manufacturing, but surely the question to ask is how are Australia’s domestic market regulations and policies favouring the development of global leaders in key technologies and services. I’d have to say “not very”. There were almost no Australian booths on the trade show floor dedicated to showing off Australia’s unique contribution to the LNG sector (possibly because there hasn’t been any yet). Perhaps at LNG19 in China there will be booths from Australia.