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LNG Project Development Catching ‘Second Wave’ in U.S., Around the World

The global liquefied natural gas (LNG) trade is rippling toward the second wave of investment, as more countries open their doors to industrial expansion and consumer needs, some of the top gas executives said Wednesday.

During a morning panel at the World Gas Conference (WGC) in Washington, DC, Baker Botts LLP’s Steven Miles, who heads the Houston-based LNG practice, moderated a high powered panel of executives who discussed the opportunities and the challenges ahead for North American projects and those overseas.

Miles was joined by ExxonMobil Corp.’s Jim Muschalik, president of LNG market development, Tellurian Inc. CEO Meg Gentle; Shell Energy’s Steve Hill, executive vice president, and Mitsubishi Corp.’s Jun Nishizawa, COO of the energy resources division for the Americas, Europe and the Middle East. Also on the panel were Cheniere Energy Inc.’s Andrew Walker, vice president for strategy and communication, and Jason Bordoff, founding director of the Center for Global Energy Policy at the Columbia School of International and Public Affairs.

“When the previous WGC was held in 2015 in Paris three years ago, “the industry was at the end of a building cycle,” Miles said. The “first wave” of final investment decisions (FID) had been made for U.S. LNG export projects and facilities were moving toward completion in Australia.

A “bit of a rough patch” then came from the slump in oil prices in late 2014 that continued until 2016. While global gas supplies continued to increase, while there were few FIDs.

No LNG projects were sanctioned in North America last year. This year to date, only Cheniere Energy Inc. has issued an FID for its third train at the or its planned Corpus Christi export terminal in South Texas.

The slowdown isn’t only in the United States. Two global LNG projects were sanctioned two years ago, but only Coral FLNG in Mozambique this year received an FID by ExxonMobil and Eni SpA. Coral is in the same region as an export project underway by Anadarko Petroleum Corp.

Today, however, “there are branches...greenshoots,” for LNG development, Miles said. Cheniere last year ramped up exports from the Sabine Pass facility in Louisiana, while Dominion Energy Inc.’s Cove Point terminal in Maryland recently began shipping gas to overseas markets.

Optimism is steadily rising, and it’s based on clear evidence, said the experts. The global LNG trade last year climbed to 38.2 Bcf/d last year, nearly 10% higher than in 2016 and the largest annual increase on record, according to the International Group of Liquefied Natural Gas Importers.

A sign that domestic exports are going strong is that U.S. gas exports in 2017 topped 1.94 Bcf/d versus 0.5 Bcf/d in 2016. All of the shipments originated from the Sabine Pass terminal, , with shipments reached 25 countries. Cove Point will be on the board in this year's statistics, and more projects are expected to soon be sanctioned.

Because gas trading has been regional for so long, Miles asked the panel if the LNG industry was ready to claim “good times or is it just wishful thinking?”

Muschalik, who is based in Houston, said he’s been “picking up on two things -- a lot of optimism and excitement about the gas business and specifically, the LNG business, and for good reason.

“When you look at the demand for gas in the next 25 years, there’s an increase of 25%, and that’s probably somewhat conservative. When you put LNG in that mix, it’s going to be expected to double over that horizon.”

His “personal eye as to what’s going on here, to feel good about, is that energy growth in the global economy is enabling a lot of folks to improve their quality of life” and access affordable energy that is abundant and “cleaner” than coal because it has lower emissions.

“There’s a really good story there” and “a lot to feel good about,” the ExxonMobil executive said.

There remains some uncertainty about the LNG supply picture overall, though.

“One thing as we meet with buyers to find out what’s on their minds, it’s certainly stability,” to have supply sources to meet their needs, he said.

With the dearth in FIDs for LNG projects in the last few years, the current period of excess gas supply could dry up quickly, leading “right back into scarcity and facing challenges,” he said.

Tellurian’s Gentle has a lot of irons in the fire through her management of Driftwood Holdings LLC, which was formed to own and operate a network of onshore gas production, LNG trading and infrastructure, including the proposed 27.6 million metric ton/year Driftwood LNG export facility for Louisiana.

Tellurian now is lining up partners to help with financing for a slate of Lower 48 projects, including a pipeline that would carry associated gas from the Permian Basin and another from the Haynesville Shale, each to feed local markets and future gas exports.

“It’s clear that the expansion of the LNG market is an incredible opportunity ahead of us,” Gentle told the audience. LNG trade by itself grew year/year in 2017 by around 11%, and growth should be about the same this year, she said.

Tellurian’s management team sees “tremendous opportunities” from growing U.S. production, both dry gas and associated gas from oil drilling to keep export trade well lubricated.

She echoed Muschalik in noting that infrastructure needs to continue to be built to provide enough capacity for the continued surge in output.

“We know the United States can support another 100 million metric tons of capacity,” Gentle said. “We need to build that infrastructure,” particularly in the Permian, to not only transport associated gas but ensure there is continued oil drilling in the basin.

Hill, who worked for BG plc in its LNG business before Shell bought the company, said the enthusiasm for LNG is “real,” evidenced through the thousands of participants at this year’s WGC.

“It’s not just theoretical long-term growth,” Hill said. “We are actually seeing things in the market…and demand growth continues to exceed expectations.” For example, China is hungry for LNG, driven in part by its decision to add more gas-fired capacity and phase out coal. China’s gas consumption last year increased by 15% from 2016, while imports grew by 28%. The country’s import dependence grew to 39% last year from zero in 2005.

A growing thirst for gas also is evident from growing LNG trading in India and in Europe, Hill said, noting that one of Central Europe’s leading utilities, Polish Oil & Gas Co., on Tuesday agreed to buy gas exports over 20 years from two separate proposed projects to be sited in Louisiana and Texas.

“I also see widening opportunities in transportation,” Hill said. “There’s a lot of opportunity going on.”

The Shell executive, like his peers, also sees challenges. “One is that we spend a tremendous amount of time telling each other how great gas is but not nearly as much time telling the rest of the world,” Hill said. With gas as the “backbone of the energy transition,” the industry has to do a better job in selling its positive attributes to the public.

The other concern,” he said, is that “we have made this industry too complicated and everything too hard” in regards to pricing gas. I think the industry has done a really good job of providing customers with different pricing solutions...” Now there is a “plethora of different pricing constructs in the industry.”

One type of customer “wants to buy the LNG at the LNG price,” Hill said. “It’s so hard to know what that is.” Long-term contracts “have a clear role to play in the industry, but they also have a dominant effect on growth of the industry” and can actually stifle investment.

In the earlier days of the LNG trading, Hill noted that there had to be long-term contracts because there was no spot market. The spot market for LNG since has evolved.

“We still hear that you have to have long-term contracts,” Hill said. “I’m not convinced that we still live in a world where there’s any more risk for LNG than for any other kind of commodity,” including for oil or coal.

The long-term contract business model “somewhat constrains the growth of industry,” and he’s unsure it’s as necessary today as it was years ago.

Mitsubishi’s Nishizawa forecast the United States, Canada and Russia would become the top LNG suppliers in the world, joining LNG leader Qatar. Mozambique also should become a major supplier.

Russia may not be on everyone’s LNG leaderboard, but the country has massive stores of gas, he said. “Can Russia become a major supplier? This is a question everybody wonders...But my answer is, yes, she can,” Nishizawa said.

Russia’s state-owned Gazprom and Rosneft were taking direct aim to supply the United States through LNG imports before the unconventional gas explosion. Russia has gained a foothold in China with a plan to build a massive gas pipeline. It also sends gas to Europe. Meanwhile the country’s Sakhalin gas and the recently completed Yamal LNG export project in the Arctic likely will become major contributors to global markets.

The Mitsubishi executive has “no doubt” that the United States long will reign as a leading exporter. But whether the United States can keep up the production pace may be in question. “Some data shows a lot of gas,” he said, “but it is also true that most of the sweet spot gas has been drilled and produced.

“As time goes by, in 10 years’ time it will be OK, but we don’t really know how long the gas supplies stay...That’s a big question.”

Canadian LNG projects may be languishing, but the country still is destined to “become a major LNG supplier in the future, especially Western Canada,” Nishizawa said. “The reason is very simple. It has a huge amount of gas,” with an estimated one-fourth of North American supply in the Western Canadian Sedimentary Basin.

In addition, gas produced and shipped from Canada can be “competitive and strong” against other LNG supplies, the Mitsubishi executive said. 

Canadian pipeline costs through the mountains are high and the country faces barriers in dealing with aboriginal issues. “But we believe using a prudent approach, these can be resolved and Canada can fly.”

Cheniere has two Texas LNG projects beyond the Sabine Pass facility in the works, Freeport LNG and Corpus Christi LNG.

There are cycles for supply, but “we go through cycles and we learn from those cycles and take and apply what we learned to the next cycles,” Walker said. “Everyone worried about the wave” of initial projects, but the management team has learned a thing or two as it staked out a market.

“We’re now in the second wave,” he said, with LNG supply between 2016 and 2020 sharply rising. “And we’re learning increasingly about flexibility in putting more volumes in and increasingly about the marketplace. And as the marketplace diversifies and fragments, the challenge is to take a large part of the supply and intermediate those into a diverse market, which has its own requirements” and a market made up of traditional buyers, new buyers, creditworthy buyers, and less creditworthy buyers.

“This is a challenge for industry to take it into the next cycle,” Walker said. Cheniere sees momentum continuing for long-term contracts too.

Bordoff, who worked for the Obama administration from 2010-2012 before founding the Columbia think tank, said the LNG market is becoming more commoditized. He told the audience that an interesting trend is the emergence of portfolio buyers and trading houses, which are playing a bigger role in LNG buying and selling. That provides liquidity and scale, and provides responsiveness to the spot market, he said.

Ensuring an LNG project remains cost competitive is key, because gas projects increasingly will be competing against more renewable resources, said the panel

“We’re in a different world, where oil and gas assessment prices are going up in time, while wind and solar costs are coming down,” Hill said. “Companies are making investments for 25 or 40 years for a project’s life. It’s crucial that you have the most competitive project, but with the lowest emissions as well,” because down the road that project may be competing with a wind or solar facility.

ExxonMobil’s LNG executive team has a view that all U.S. LNG projects will need to be able to compete for primary markets, “so it’s with great care that everyone needs to enter the space with a narrow risk profile, a competitive structure in place.”

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