Transcript Document
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LNG
’
s Transformation from Regional to Global Commodity
7 th Doha Natural Gas Conference & Exhibition G. M. (Chip) Schuppert, Jr Manager, Global LNG Marketing & Sales ConocoPhillips 9-12 March 2009
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Dramatic Growth in LNG Trade
Growth in:
• Volume • Number of trade routes • Diversion & short term trades Growth in ability for more “commodity-like” response to market changes….
Improved Ability to Respond to Market Changes
• Recent “Perfect Storm” of 2007-8 in Asia caused by: – Unexpected decline in some existing LNG supplies – Significant Japan nuclear power outage – Significant delays in completion of new supply projects – Major equipment failures and supply interruptions – Significant & rapid increase in demand from new markets • Result: Dramatic increase in need for additional LNG
supplies to Asia in 2007-8
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Supply response to “perfect storm” of 2007-8 required unprecedented degree of flexibility from LNG supply markets
Increased Flexibility of LNG Supply Markets Supply Response to “Perfect Storm” of 2007-8 LNG was delivered:
» Where it was needed » When it was needed 4 • The rerouting of supplies naturally required corresponding changes in market price to prompt the redistribution • The LNG supply markets demonstrated a relatively quick and significant “commodity-like” response
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Supply Response: 2007-8 Asia Demand
As % from Atlantic Sources 16 14 12 10 8 6 4 2 0 2005 2006 2007 Source: Cambridge Energy Research Associates.
Updated January 2009 2008 Ability for relatively quick and significant supply response was direct result of supply flexibility developed in recent years
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Multiple Sources of Flexible Supply
Atlantic to Pacific Basin LNG Flows
16.00
Source: Wood Mackenzie 14.00
12.00
10.00
8.00
6.00
4.00
2.00
2003 2004 2005 2006 2007 2008 Algeria Nigeria Egypt Norw ay Eq. Guinea Trinidad
Key Enablers
• Contractual flexibilities – Diversion Capability – Supply Aggregators – Spot cargos from uncommitted production • Extra shipping capacity – Speculative-built ships – Ships associated with delayed supply projects • Construction of addt’l regas capacity in liquid markets • Indirect access to U.S. gas storage
LNG: Transitioning to Worldwide Commodity?
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True Commodity
Single price
Current State of LNG
Regional pricing – but tending to trend together Single quality standard Effectively 2 different standards – “rich” & “lean” Fungibilty (interchangeability) True spot market Fin. hedging available Relatively easy access to storage 2 different quality standards reduce fungibility – but many LNG Buyers adjusting to accept either for supply flexibility Relatively small true spot market – but significant growth in Diversion and Flexible Supply markets Financial hedging very limited, difficult and complex High ($/mmbtu) storage (and transport) costs, no true 3 rd party merchant storage
Relatively high cost of storage may be single biggest longer-term impediment to true “commoditization” of LNG
Relative High Unit Cost of LNG Storage
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Storage Tankage Capex Cost $/MMBtu
100 90 80 70 60 50 40 30 20 10 0
Source: ConocoPhillips Fuel Oil Refined Products Intermediates LNG LNG has one of highest storage costs per unit of energy. But LNG markets indirectly accessing storage through alternative means.
Indirect Access to Storage
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4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500
Sources: EIA, CERA, WoodMac
16% 14% 12% 10% 8% 6% 4% 2%
• N.A. has large gas storage position • Indirectly benefits other world LNG markets • Facilitates diversions to meet Buyers’ needs • Can serve as “default” market for Sellers • Serves to attenuate LNG price volatility
NA
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S. Korea Spain Japan UK Liquid N.A./EU markets – as well as excess shipping capacity have, to a degree, served as an indirect form of LNG “storage”
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Relative High Unit Cost of LNG Transport
0.00012
US$ Cost of shipping various fuels US$/MMbtu/km
Source: ConocoPhillips
0.00010
0.00008
0.00006
0.00004
0.00002
0.00000
Crude 2MM bbl Fuel oil Gasoline LPG LNG
Impediments to Global Commoditization
11 • Relatively high cost of storage & transport • Indirect access to storage is limited & inefficient • A-P Buyers’ supply-constrained environment – Little to no indigenous supplies – Little to no access to PL gas supplies – Greater emphasis on security of supply – Result: preference for regional supplies and longer-term contracts • Potential “tightening” of the shipping market • “Terming up” of current flexible/divertible supplies • Continued difficulties in sanctioning new supply projects
Some regionalization of markets is likely to remain for some time even as LNG supplies become more flexible
Global LNG Price Setting Mechanisms • Gas-to-gas competition • Liquid spot market • Dual price dynamic - NBP spot - Oil related contracts • Oil linked contracts Source: Cambridge Energy Research Associates 12 Global LNG Links & Arbitrage
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The Transformation of LNG
from Regional to Global Commodity In Summary:
– Recent improvements in supply flexibility has enabled: • Significantly improved supply response • Greater worldwide “commoditization” of LNG – Supply flexibility is poised to grow - but could be threatened by: • Tightening of shipping market • Terming-up of divertible supplies • Continued difficulties in sanctioning new supply projects – Relatively high costs of storage may continue to be a hurdle to the complete and total “commoditization” of LNG – Some “Regionalization” of the market place may continue - but with greater trending and stronger correlation between regional markets
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