The global liquefied natural gas (LNG) arena offers plenty to watch: Growing supplies in Australia coupled with growing demand from traditional and emerging Asian markets, for instance. But “one of the most startling developments” is what is happening in North America, Vinson & Elkins energy lawyer Jay Cuclis told a Houston audience Wednesday.
It was only seven years ago when the United States had four operational LNG import terminals and more than 50 proposals on the boards for new or expanded LNG import capacity. This year, nearly all of the import projects have been shelved and there are about 10 export facilities proposed in North America, Cuclis said at IHS CERAWeek 2012.
To be sure, the United States still imports LNG, but pushback from domestic shale gas supplies last year trimmed LNG imports by about 20%, according to Cuclis. As the domestic shale gas story unfolds, talk of U.S. energy independence — at least where natural gas is concerned — is commonplace.
Meanwhile, the Obama administration is sitting on LNG export application approvals while it studies the potential impact of exports on domestic gas prices. Also at CERAWeek, the U.S. Department of Energy’s Daniel Poneman, deputy secretary, said no more projects would be approved for export to nonfree trade agreement (FTA) countries until the impact on markets is better understood.
Cuclis said export project developers likely will need broad export rights — with the ability to send LNG to FTA and non-FTA countries — to create the necessary flexibility to support their projects. He said the debate over projects will likely center on the public interest question: what exports would mean for U.S. consumers and industrial gas users.
Diving into more detail than the broad regulatory approval question, the LNG liquefaction and contracting business is evolving, Cuclis said. For instance, it is now more typical for LNG buyers to want to have an equity position in LNG projects, and this sometimes complicates contract negotiations, he said.
Contract terms have traditionally been 20 years, but some in the industry are wondering whether this should change, he added. Chinese buyers of LNG usually want cargoes to be delivered to them on tankers that were built in China, he said. And in some parts of the world, East Africa, for instance, LNG projects are being developed where none existed before. This means the legal framework for an LNG business needs to be built from scratch along with terminals and other infrastructure.
Because of its global nature, politics sometimes trumps practicality and market efficiency when it comes to sourcing natural gas or LNG. For instance, Chile recently decided to move ahead with an LNG import facility despite significant gas supplies in nearby Bolivia, Cuclis said. Similarly, India has potential gas supply on the other side of its border with Bangladesh. But political opposition to exporting to India means a heightened interest in that country in acquiring LNG.
While the United States is on the cusp of becoming an LNG exporter, Australia’s role in the global gas trade is only poised to grow, Santos CEO David Knox told conference attendees. Australia’s Santos, a major exploration and production company, has a stake in several of the country’s approximately one-dozen LNG projects.
By 2018, eight LNG liquefaction projects under construction in Australia are expected to be online, making the country the world’s largest exporter of LNG, Knox said. “Australia’s significance in the global LNG marketplace is clearly expanding.”
Three factors are driving Australia’s buildout of its LNG industry, which began 20 years ago with the North West Shelf project. They are Asian demand for gas, the quality and scale of Australia’s gas resource, and price, particularly given the proximity of Australia to Asian markets.
“On just about every measure, the driver for future LNG demand comes from Asia,” Knox said. “From now until 2025 demand is set to double to around 300 million [metric] tons.”
Besides traditional LNG consumers Japan, India, Taiwan and Korea, southeast Asian countries are entering the market as buyers. Among them are Indonesia and Malaysia, which also are traditional LNG suppliers, Knox said.
Australia is capable of serving existing and future LNG customers thanks to its abundant gas reserves. By 2020 the country is projected to export 2.2 Tcf of gas per year as LNG while its domestic gas market will be 1.8 Tcf, Knox said. Australia has enough known resources to meet 80 years of demand at home and abroad, he said.
“We see unprecedented Asian demand; we know that Australia’s gas is abundant and available.”
Long term, those Asian buyers will be paying an oil-indexed price for their LNG, Knox said, noting that “it makes sense” to have the price linked to a fuel substitute such as oil. Asian buyers are comfortable with an oil-indexed price, he said.
Despite Australia’s apparent dominance of the Asian LNG market and buyers’ preference for an oil-indexed price, there is room for U.S. LNG supplies to serve the market as well, Knox said. “Asian buyers want supply diversification…so ultimately LNG from all sources is going to find a home, provided we can produce it at a price that is affordable and attractive,” he said.
With all of the liquefaction projects slated for Australia, the United States and elsewhere, some might fear an LNG glut from a surge in supply. Rob Bryngelson, CEO of Excelerate Energy, a developer of floating regasification and potentially in the future floating liquefaction facilities, said oversupply should not be a worry.
The last time a supply surge was expected to create an LNG glut was following the commissioning of multiple LNG liquefaction projects in Qatar. As happened then, any future surplus will be absorbed by the market, Bryngelson said.
Another nonconcern to his thinking is the development of shale gas production capability in countries that are currently buyers or those that will be buyers of LNG. “People want to have multiple supply sources; the unconventional gas is complementary to what we’re trying to do,” he said.
Excelerate is looking at 38 floating regasification opportunities around the world, Bryngelson said. The drivers of these projects are security of gas supply, environmental preferences for a cleaner-burning fuel, a cost savings in the price of natural gas relative to oil, as well as plain old gas demand growth, he said. As Excelerate shops its floating regasification technology abroad, the company would like to prove its capability to develop a floating liquefaction facility, probably in the Gulf of Mexico (GOM). “We’re looking at a number of projects around the world,” he said. “The problem is nobody wants to be first.”
The GOM is attractive for floating liquefaction on a number of fronts. For one, there is security of gas supply. For another, the regulatory environment is generally friendly, Bryngelson said. Floating liquefaction projects also would have some advantages over stationary facilities, he said.
For instance, they’re built in a shipyard, so the people and resources needed are at hand and don’t have to be moved to the development site. Additionally, developing a project remotely and then moving it to its site can help avoid cost creep like that seen when multiple projects are being developed in the same region or country, such as Australia, he said. Additionally, when markets or other circumstances change, a floating liquefaction vessel can be redeployed elsewhere. That’s the kind of flexibility a number of owners of U.S.-based regasification facilities likely wish they had today.
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