Transcript Developments in the Global LNG Market – Would Venezuelan

GLOBAL DYNAMICS OF LNG BUSINESS
GIE ANNUAL CONFERENCE
GRONINGEN
6-7 MAY 2009
JEAN VERMEIRE
President GIIGNL
Presentation of GIIGNL
• The International Group of LNG Importers, better known by its French
acronym GIIGNL, is a non-profit organisation which was established in
Paris, France, in December 1971
• GIIGNL membership presently includes 61 member companies from 20
countries of Asia, Europe and the Americas , or nearly every company
involved in the importation of LNG and the operation of LNG receiving
terminals
• Membership has evolved in line with the development of the LNG
industry and now includes gas merchant and power companies,
infrastructure companies and several of the major international oil
companies
Legal Notice
The information presented here represents the views of
the author and not necessarily those of the member
companies of the International Group of LNG Importers
(GIIGNL)
MAJOR THEMES
Global LNG Supply/Demand Outlook
– Near-term: next 5 years
– Long-term: 2013-2030
Developments in LNG Markets and Trade
– Changes in Business Models
– Spot trade, Flexible LNG and Arbitrage
– Pricing: is Convergence likely?
Global LNG Supply/Demand Outlook : next 5 Years
« Sudden » supply overhang due to:
• Worldwide reduction gas demand, primarily in
industry and power (economic crisis, fuel switching )
• Collapse U.S. LNG import needs (push
unconventional gas production)
• Offtake commitments under long-term pipegas
contracts in Europe
• Sharp increase liquefaction capacity 2008-2010
( +35% over 2007) from pre-2006 FID’s
North America functions as market of last resort
and soaks up surplus
•
•
•
•
LNG is price taker
Increase of summer cargoes into G of M
Low prices causes rapid decline U.S. production
Alternative of shutting-in LNG production
technically and commercially unattractive
Global LNG Supply/Demand Outlook : next 5 Years
• New projects suffered start-up delays and commissioning hickup’s leading to supply surge in 2009/2010
• Limited supply additions between 2010 and 2013:
• Postponement FID for several projects may lead to supply
shortage from 2014/2015 onwards as demand recovers:
–
–
–
–
–
–
–
Awaiting further cost reductions
Declining prices (and faster than costs …)
Security of demand concerns (recession)
Financing obstacles
Conflicts in allocation feedgas between domestic and export use
Environmental hurdles
Political tensions
Capacity additions 2008 to 2010
Sakhalin II Train 1-2
(9.6 MTPA) 2Q09
Dua Debottleneck
(1.5 MTPA) 3Q09
Tangguh Train 1- 2
(7.6 MTPA) 2Q09
NWS
(4.2 MTPA) 4Q08
Liquefaction Plant—
Existing/Under Construction
Source: Cambridge Energy Research Associates.
own updates
Nigeria Train 6
(4.1 MTPA)
1Q08
QatarGas II Train 4
(7.8 MTPA) 1Q09
QatarGas II Train 5
(7.8 MTPA) 4Q09
Qatargas III 3Q10
Qatargas IV 4Q10
Yemen Train 1- 2
(6.7 MTPA) 3Q09
RasGas Train 6
(7.8 MTPA) 3Q09
RasGas Train 7
(7.8 MTPA) 1Q10
LNG Final Investment Decisions
2002-04
2005
2006/2008
2009
?
PLAY
FAST FORWARD
•Australia-Darwin
•Egypt-Idku
•Equatorial Guinea
•Nigeria-NLNG4-6
•Norway
•Oman-Qalhat
•Qatar-QatarGas II,RG 5
•Russia-Sakhalin
•Trinidad 4
Source: adapted from CERA.
•Australia NWS 5
•Indonesia Tangguh
•Qatar-RasGas III
•Qatar-QatarGas III & IV
•Yemen
PAUSE
•Algeria-Skikda
•
-Gassi Touil
•Australia-Pluto
•Peru
•Angola
STOP
•Australia - Gorgon
- Ichthys
- Wheatstone
- Curtis
•Papua New Guinea
•Egypt Damietta 2
•Russia Shtokman
•Nigeria - Brass
- T7
- OK LNG
et al….
Historical Trend in 2008 Term Dollars
LNG Liquefaction Capex
1,600
1,400
1,200
$/tpa
1,000
800
600
400
200
1965
1970
1975
1980
1985
1990
1995
Year
Data from Wood Mackenzie (used by permission)
2000
2005
2010
2015
2020
Global LNG Supply Demand Outlook : 2015-2030
Worldwide LNG demand forecast influenced by - but
not necessarily parallel to - gas demand forecast
Distinguishing factors between LNG and gas demand
scenarios :
– Monetizing new large discoveries of « remote » gas
– Geopolitics and interregional pipeline development
– Security of supply and diversification of sources
– Exploration/production performance domestic
(unconventional) resources
– LNG chain construction costs
Long-term liquefaction capacity projections
100 Million mt/year
9
8
7
6
5
High
Low
4
3
2
1
0
2000
New FID’s required
2005
2010
2015
2020
2025
2030
Range of LNG supply scenarios to 2030
High
• 2013-2030: 6 % p.a.
Low
• 2013-2030: 3 % p.a.
(compared to 7.5 % p.a. in 2000-2013)
• Bullish view on new export projects
(significant new discoveries remote gas,
security of supply concerns, decline
domestic production, construction cost
decline)
• Largest contributors:
– Atlantic: Nigeria; Russia
– Pacific: Australia
– Hybrid: Iran (post 2020)
• Australia and Nigeria may overtake
Qatar
• High development costs and
political /commercial
uncertainties; unconventional
production growth sustained
• Supply growth barriers in
Atlantic and Middle East, but
Pacific less affected
• Supply shortages likely if U.S.
import needs turn out higher
• Qatar remains largest exporter
Where Will Next Generation LNG Come From?
LNG Capacity by Status and Country
N.B. Proposed projects have
varying degrees of likelihood
M a u rita n ia
M yn a m a r
A n g o la
P a p u a N e w G u in e a
V e n e z u e la
Ira n
L ib ya
E q u a to ria l G u in e a
N o rw a y
P e ru
E x is tin g
Abu D habi
Yem en
C o m m ite d
B ru n e i
R u s s ia
P ro p o s e d
O m an
E g yp t
T rin id a d
N ig e ria
M a la ys ia
A u s tra lia
A lg e ria
In d o n e s ia
Q a ta r
0
10
20
30
40
50
60
M illio n T o n s p e r Y e a r
Source: CERA
70
80
90
MAJOR THEMES
Global LNG Supply/Demand Outlook
– Near-term: next 5 years
– Long-term: 2013-2030
Developments in LNG Markets and Trade
– Changes in Business Models
– Spot trade, Flexible LNG and Arbitrage
– Pricing: is Convergence likely?
Changes in Business Models
Structural changes in the LNG industry and
underlying reasons
– Traditional model: “tramline projects” with long-term
dedicated contracts and bi-lateral trade
– Major expansion expected in US was catalyst for change in
Atlantic Basin
– Transition in Europe further induced by early cargoes or
additional volumes associated with long term contracted
production without contractual destination
– Growing trend towards portfolio play with shorter term
contracts, cargo deviations, spot trade and arbitrage play
Changes in Business Models
Changes in contracting strategies for LNG
supply
– Destination flexibility is key, but who controls?
– Removal of destination restrictions in European contracts
replaced by shift from FOB to DES contracting
– Profit-sharing mechanisms for cargo deviations under
scrutiny by competition authorities
– Acceptable compromise are “push-button” diversion clauses
– Master sales agreements and confirmation notices per
transaction allows rapid execution of spot trade
Changes in Business Models
Commercial Strategies
– Resource holder/producer strategies
• Shorter contracts
• Not contracting entire capacity
• Self-contracting
– Marketers and gas merchants pursue LNG trading for
arbitrage gains and to mitigate volume risk
– Aggregators assume volume risk under long-term FOB
contracts in return for destination flexibility of LNG
Changes in Business Models
• Vertical integration in both directions to mitigate risk (security
of supply as well as of demand ) and enhance margins
• All battle for the midstream, with producers holding trump card
in sellers’market,..but near-term outlook has changed suddenly !
• Only niche operators protected by specialized expertise (e.g.
shipping companies) or regulatory measures (e.g. terminal
developers/operators) escape integration drive
Spot trade, Flexible LNG and Arbitrage
Source and development of LNG Spot Market
– Annual growth rate past 10 years
• Spot/Short-term LNG Trade = 15%
• All LNG Trade = 7.5 %
(currently 20% of total)
– Source of spot/short-term trade
• “true spot”
• “flexible LNG”
– According to CERA :
• 50% of capacity added in 2008-2010 is flexible
• By 2010 25% of total capacity is flexible LNG
• Major growth of flexible production in Middle East
Spot trade, Flexible LNG and Arbitrage
Drivers of and conditions for spot trade
– Flexible LNG seeks markets of highest netback
– Price signals determine redirections of contracted volumes and
destination of cargoes tendered
– LNG buyers competing on global basis for flexible LNG
– Trade of flexible LNG requires:
• spare regas capacity
• spare shipping
• ample LNG supply …..and willing buyers !
Spot trade, Flexible LNG and Arbitrage
Spare shipping capacity to allow for cargo
deviations and arbitrage
Rapid expansion
Capacity increase
2006:
28 deliveries
4.0 mln m3 (liquid)
2007:
33 deliveries
5.0 mln m3
2008:
52 deliveries
10.0 mln m3
2009 (est.)
50 deliveries
8.5 mln m3
End of 2009
355 vessels in fleet
45.5 mln m3 total capacity
Source: Poten and Partners
"Theoretical redundancy in LNG shipping capacity: +/- 35%" (CERA)
Spot trade, Flexible LNG and Arbitrage
Impact on security of supply and prices
– Flexible LNG supply suitable for demand peaks and supply
disruptions, less for base load needs (unless reliable access
to alternative supplies)
– Need to outbid competition on global basis to attract
cargoes, leading to increased volatility of wholesale prices
– Critical will be the timing of transition of US market from
current “sink” to base load buyer (unconventional resources
are key)
Spot trade, Flexible LNG and Arbitrage
Rationale for investing in regas capacity
–
–
–
–
Easier to control own supply logistics for new entrants
Necessary condition to procure LNG
Relatively small cost as % of total LNG chain
Value of option for arbitrage play higher than regas cost
(price hedge)
– Insurance against supply disruption (physical hedge)
– Unreliable secondary market and impractical UIOLI
– Low “annual average” utilization can be misleading
Implications for pricing: is convergence
likely?
Price Setting mechanisms
– Concepts for gas pricing can be based on: traded markets,
bi-lateral contract markets or government determination
– Europe has different price setting for spot and for long term
transactions
– Europe and US have different supply/demand drivers and
have different short-term clearing price mechanisms
– Can physical trading link between both markets lead to price
convergence in traded markets?
Implications for pricing: is convergence
likely?
Conditions for price convergence
– Convergence understood as: operation of single price
mechanism between two traded markets
– Requirements for LNG trade to establish convergence
between US and Europe (and eventually Asia)
• Sufficient discretionary supplies which respond to price signals
• Surplus shipping capacity
• Accessible surplus regas capacity
• Supply and demand in balance in respective markets
LNG must become “price maker” instead of “price taker”
Implications for pricing: is convergence
likely?
Outlook on convergence or divergence
– Past: occasional influences between HH and NBP but no
convergence
– Outlook: convergence in Atlantic Basin only if USA needs
more LNG and ample supply of flexible LNG available
– Critical developments
• Can recent increase US gas production be sustained?
• Will new LNG projects continue to feed sufficient
flexible LNG into Atlantic Basin?
Thank you for your attention
Back-up slides
LNG Supply Chain : Typical costs & returns
5 Mt
$400 per
tonne capacity
5 Mt single train
$750 per
tonne capacity
5 ships
$220M
per ship
US$2.0bn
US$3.75bn
US$1.1bn
(27%)
(50%)
(15%)
$90M per
1 BCM/yr capacity
US$0.6bn US$7.45 bn
(8%)
(100%)
13.7%
Source : Wood Mackenzie, Deutsche Bank
Own estimates
?
Expected LNG export capacity by region
Note: Hybrid = Capacity which could routinely supply both the Atlantic and Pacific region LNG markets, not necessarily
rigidly committed to particular markets at present
Source: IEA analysis.