--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, June 26 The gap between
perception and myth in liquefied natural gas (LNG) is widening,
with both buyers and suppliers appearing to subscribe to views
that bear limited resemblance to reality.
This dynamic was very much in evidence at this week's
Australian Gas Export Outlook (AGEO) conference in Brisbane,
where buyers appeared confident that a wave of new projects
around the world would leave them spoilt for choice of supply,
and at lower prices.
Producers labour under the impression that Asian demand, led
by China, is a bottomless pit that will suck up all the LNG they
can make, while still earning high, oil-linked prices.
The outlook for LNG is confused and the industry isn't being
well served by the lack of clarity.
It's time to try and debunk some of the myths.
Myth 1: A wave of LNG is coming from global projects
At the AGEO meeting this week, senior representatives from a
major Japanese LNG buyer and an Indian buyer spoke of the
increased supply expected from the United States, Canada and
They spoke as if the projects that have been proposed are
all likely to become reality, and within the timeframes mooted.
This is extremely unlikely, and what appears to have
happened is that project developers have proposed so many new
plants that buyers seem convinced they are about to be swamped
The reality is likely to be far more sobering.
What is certain is that global LNG supplies will get a
substantial boost between now and 2019, as the seven projects
now being built in Australia come into production.
These will take Australia's annual output to more than 80
million tonnes, so that it overtakes Qatar as the world's top
It is also certain the first U.S. project, Cheniere's
Sabine Pass, will start in that timeframe, ramping up to
a total of 20 million tonnes.
These projects, and a handful of others now being built, are
likely to lead to a small market surplus of LNG around 2018.
But buyers' expectations of a sustained surplus are built on
huge new supplies coming on stream in the United States, Canada
and the East African nations of Mozambique and Tanzania.
The U.S. Federal Energy Regulatory Commission (FERC)
approved construction of Sempra Energy's Cameron plant
on June 19, the second such approval after Sabine Pass.
This makes it likely that Cameron LNG will proceed to final
investment decision (FID) and start construction.
There are three other projects awaiting FERC approval, and
assuming this is granted and the plants are built on announced
timelines, U.S. exports will be around 67 million tonnes per
annum by around 2020.
Beyond that there is potential for another 220 million
tonnes capacity, but whether this is approved and built is very
Several problems come to the fore. The approval process is
likely to change, requiring projects to pay for expensive FERC
approval prior to that from the Department of Energy.
Most of these proposed projects don't have committed buyers,
or gas supply. Rather many are so-called tolling projects that
merely charge for the liquefaction process, with the sourcing of
feedstock gas and shipping being buyers' responsibility.
This leaves them highly exposed to U.S. Henry Hub gas prices
, which are now about $4.58 per million British thermal
unit. However, many analysts believe the trend is higher over
the coming years, and U.S. gas prices also suffer from seasonal
or weather-event-related spikes.
Canada's regulator has approved plans for nine projects
totalling 145.3 million tonnes a year, but only the Chevron-led
Kitimat venture is close to taking FID, and even it
faces numerous hurdles.
One of these is support from Canada's First Nations, the
Aboriginal people across whose land gas pipelines and other
infrastructure must be built.
This is proving hard to get, not only for the Kitimat
project, but for virtually every other proposal.
The Canadian ventures also lack sufficient firm sales
contracts, meaning bankers may be reluctant to finance projects
in the absence of a guaranteed revenue stream, even if the
economics look viable.
In Mozambique and Tanzania, the only certainty is that large
discoveries of offshore gas have been made.
The rest of the proposals there are just ambitious plans,
notwithstanding the involvement of serious industry players,
such as Anadarko, Norway's Statoil and Exxon
Uncertainty over regulatory frameworks and concern over
corruption are common to both East African nations, as well as
an almost complete lack of any infrastructure in the remote
areas where the plants are proposed for construction.
Mozambique LNG's website is still saying it's targeting
first cargoes in 2018, but this must be very unlikely, given its
current lack of progress.
Overall, once the projects already being built and up to
four or five more in final stages of planning in the U.S. are on
line, there isn't much in the way of confirmed new supply on the
Myth 2: U.S. LNG will force LNG prices in Asia lower
This myth is based around the wide gap between U.S. natural
gas prices and long-term, oil-linked contract prices in Asia,
with Japanese buyers typically paying an average of around $15
to $16 per mmBtu, almost four times the Henry Hub price.
Since U.S. LNG projects can source gas at U.S. prices, the
theory goes that adding in liquefaction and transport costs of
around $7 per mmBtu, takes the cost of LNG delivered to Japan
from the U.S. Gulf Coast closer to $11 per mmBtu.
There are several problems with this, the most obvious being
that U.S. producers will sell at a steep discount to Australian
and Middle East suppliers.
Rather, it's more likely they will sell at a cost just
fractionally cheaper than rivals, so allowing them to maximise
profits while ensuring market share.
This myth also works on the assumption that U.S. gas prices
will remain low for decades. However, the risk must be for them
to rise as increasing demand from electric utilities, industrial
users, transport and residential customers starts to soak up
even the huge amounts of available shale gas.
It is likely the entrance of U.S. LNG to the Asian market
will force changes to the market, perhaps by ending destination
clauses and by reducing, or even ending, oil-linked contracts.
But sharply lower prices are not as likely as buyers hope,
and even if they were delivered, it would only be for a very
short period as new LNG capacity would simply not be built and
existing capacity would idle, or run at reduced rates.
Myth 3: China will buy whatever can be produced
China has a pollution problem and needs cleaner energy.
That's not a myth, but the belief that the Chinese will be
prepared to use ever-increasing amounts of expensive LNG is
probably about as hopeful as the iron ore miners who saw demand
rising for decades to come.
Yes, China is building re-gasification terminals at a rapid
rate, with 50.2 million tonnes under construction or approved,
more than doubling the existing 31.1 million tonnes.
There are plans for a further 29.5 million, but even if all
this capacity is added, it's by no means certain all will be
Chinese demand is likely to reach some 60 million tonnes
around 2020, but this can easily be met from new supply already
Additional demand will be added by new import facilities in
Southeast Asian countries such as Singapore, Malaysia, Indonesia
and Thailand, but again this is likely to be met.
Myths, if widely believed, distort markets and LNG appears
to be in this category. Buyers awaiting cheaper LNG have to
realise this is unlikely, unless investors with billions of
dollars are prepared to back risky projects in the United
Project proponents need to do a reality check on the
likelihood of finding stable, committed buyers willing to pay
prices high enough to justify massive initial investments.
This isn't to say more projects won't be built, but only
developments in the United States, Canada, East Africa and
elsewhere that offer compelling economics will go ahead, and
there won't be that many of them.
(Editing by Clarence Fernandez)