LNG from the US – between drivel and miracle drug
Does anyone still remember the US LNG import adventure? Seems to be a long way off. Today, everyone talks about the US becoming a huge LNG exporter. How about that?
Since I have gotten interested in LNG I don’t stop wondering, if anyone in LNG still takes the long-term nature of the business seriously. Of course, there are many, but they seem to be drowned out by the very short-term thinkers. Short-term thinking must prevail on the financing side as well otherwise, I have a hard time imagining how those deals come together.
I have already dropped the hint in other posts. The Black Mamba problem. What happens if the LNG plant you build is way too expensive for the market you want to serve? Either you hype the market or you hide the true cost of building LNG terminals in the first place.
Sometimes, someone miscalculates and that is just what happened to LNG imports into the US. I understand those who built the terminals and crashed. They need to find some other economic rationale to justify the expense.
Let’s look at the fundamentals. The US is exposed to both, the Atlantic and the Pacific Oceans. That means that in theory, they should have easy access to both major LNG markets. Asia but also Europe. Asia, of course, looks like big nice ice cream on a hot summer day to a distressed LNG terminal operator. But there is also big competition in this premium LNG buying region.
A swirl of Australian projects will see the light of day over the next years. Their economics are questionable but they will become operational so their volumes will hit this market. No question here. There is a whole roster of East African projects coming up – all of them fundamentally geared towards Asia. And then there is a lot of effort to bring Atlantic basin LNG into the Asian region as well to snap up some of the juicy premiums. So it’s everyone on everyone’s throats. Asian customers will love the attention of so many sellers but I doubt that this will have much uplifting effect on prices.
Building LNG export capacity is a very long-term development (up to 2020) so let’s not forget that little if any at all LNG supply will emerge from the US before that year. That’s not going to solve some of the most pressing problems for distressed would-be LNG buyers.
There is also the feed-gas price issue. You sure think I am crazy. North American gas is the cheapest on the planet now, so there is no better feedstock for LNG production. But that’s not entirely true. I still remember well that some years ago we used to apply sub-one USD per MMBtu feed-gas prices to new LNG projects in order to make them economically viable. Henry Hub has not been that low since – well not once since I know what Henry Hub actually is.
Let’s remember that Qatari LNG is produced at less than 2 USD FOB. That would include gas production and conditioning as well as liquefaction. That means technically, Qatar (and many other producers) can produce LNG FOB at a lower price than the US feed-gas price would be. In some cases, even the DES cost to Qatar would be less than the US feed-gas price. The US projects have to compete with that.
Then there is the price risk. If you contract with a classical LNG project in – let’s say, Africa – the feed-gas price is a function of the upstream cost. When I looked at upstream LNG projects, we always looked at feed-gas at less than USD 1. Admittedly, the US gas feed would come pipeline grade and stabilized which usually is a cost factor with regular upstream LNG projects as well but that factor can be boxed in very reliably.
Henry Hub is on the exact other extreme – it’s the king of volatility. Any buyer considering LNG from the US also swallows the price risk of North America. But hey, you will say. What price risk? This is North America. Natural gas prices will be the lowest on the planet for the next 400 years because of all that shale we have here. I beg to differ. I have seen those claims many times in the past. They almost always are wrong.
Then, what if Henry Hub goes expensive again? With all the gas hype in the US today, all the new uses for gas in the US, all the gas-hungry industry investment and now LNG export on the table, don’t tell me that this cannot happen again. What then? What if Henry Hub goes 15 USD again? Or more. As a buyer, you are toast. Even as an Asian buyer. Real upstream LNG projects can guarantee their feed gas price for the duration of the contract. The US projects can’t as they buy feedstock on the market.
I swear I would be a zillionaire with his own island in the Caribbean if I just could look 5 minutes into the future. The fact that I am living Mr. Normals’s life in a Central European city shows that my crystal ball gazing skills are modest.
The great Winston Churchill said that an expert is the one who predicts the future and then can explain why he was wrong. Let’s see how many experts we will have on this one.
But there is the usual silver lining. Didn’t I mention that I am a nutbag LNG fan? There indeed is a market where US-produced LNG would make a huge difference. And it’s right on the US doorstep. The Caribbean.
It’s an island world where Natural Gas is pretty unused.
Why?
Simple.
It’s hard to build pipelines throughout that area. It’s all subsea, and expensive and the markets at the end of the pipe are each pretty tiny. Why has classical LNG not taken hold yet? Easy.
One single regular LNG tanker holds a darn lot of gas in its belly. That’s not an issue for a biggish market in Asia, Europe, or indeed the US. But for an island such as Barbados for example, this would last a long time. You need to dump the cargo to liberate the vessel or you use the vessel as floating storage which makes the exercise an expensive one.
But if smaller vessels could be used the economics look very different. Small vessels just make economic sense from a nearby distribution hub which could be a Gulf Coast terminal. Small LNG transport vessels such as those employed by Antony Veder would make all the difference.
And again it’s the old “taking a shot at diesel” game. US-produced LNG competing with classical LNG projects – that’s going to be ugly. But US-produced LNG replacing dirty diesel with LNG and pushing for a change in the Caribbean island world. That has star qualities.
Of course, it’s not the huge quantities everybody loves to see in Asia. But it’s a solid business plan. And it involves hard, mind-numbing, bone-wrenching business development work. No big bang that takes all the problems away.
But more on that in another post. Stay tuned.
Great post! Clearly, we are in agreement on this one, Rudi. I wrote about it as well, a few weeks back: http://blogs.dnv.com/lng/2012/12/exports-of-lng-from-the-us-will-be-minimal/
Sorry for my late reply. 2013 starts strong. I see we are in sync on this.
For me, US exports will be driven by volume and price – no surprise. In reverse order, lets talk price. I agree that there is a real buyer price risk moving into a future based on Henry Hub – but for an Asian buyer this is diversity (we tend to think this is a European phenomenon but it works even better for Asia). With everything currently based on oil-indexed pricing this new US LNG is seen intially as a cheaper variant but Asians have been buying LNG for 40 years so understand that prices change. That’s why we see a number of the big buyer guys (with deep pockets as state organisations) taking natural hedge of buying into upstream shale assets in North America and why a lot of the other sales are going to FOB portfolio players. One other comment here is what price basis the buyers want. The Canadian Kitimat project went to market for Asian buyers on oil-indexed based pricing and got a very bloody nose – they are now having to redo their cost models based on HH premium which is what the buyers want. So what about volume. This is clearly driven by sales price in this case. The US is not in a market of “supply push” as previous LNG projects have been (ie commercialising a stranded gas reserve) but now it is “demand pull” and the LNG project developer is having to think harder and work harder to sell its LNG. Yes, the Australian projects are hugely expensive but you have to look at who is buying – mainly Japanese and China. This is regional political as Australia and its neighbours move closer together as the next great world trading block ………. commercial? I think this comes maybe second to geopolitics.
It would be insane to ignore Asian buyers hunger for HH based pricing on some of their LNG purchases. Its there. But I think this is short term thinking. No one can tell where HH goes at any time in the future. Most seem to believe that it will be the lowest gas price on the planet for the next 200 years or so. I think this is foolish. Those dynamics are so complex, the beat of the butterfly wing might just upset everything. Lets not forget that especially in JKT LNG replaced a lot of oil based fuels and moving with the oil price still makes an awful lot of sense for them. I am personally not a fan of the oil price link but I can understand that someone might want to preserve the oil link for those reasons. Lets not forget that Japan is the superstar LNG buyer of the planet. They pay vanilla prices so I would not be surprised if they would not want to have some straw fires burning in order to apply pressure to all others. If I am Japanese, I would do that. Don’t forget that at the price the Japanese pay, there is a lot of pain in the economy and everything tries to get away from pain. That’s as true for countries and companies as it is for living organisms. Someone who has as much an incentive as Japan, will wiggle very, very hard and even if much wiggling is in vain, in the long-term it always leads to something effective. NA shale would not have happened with oil at USD 20 and HH at USD 2. Now its bound to stay no matter how low oil and gas could go. Pandoras box is wide open. Imagine the same happens to gas hydrates (just an example) of which the Japanese sit on a horrible lot. What happens then?
I disagree with you on this one. I think that American LNG will be a big player. Green politics could stop this though, I am working against them ,by advocating for exports. My take is that our time window for exports is short, and we must do it ASAP or lose the best profits.
Canada is forced to export LNG because the domestic market is very small.
Fair point. As I am not tiring to say, the future is not written yet. I certainly would like to believe in lots of LNG from the US as I am a stern believer in the value of LNG as the better primary energy form and also as a fuel. If the planet is serious about going greener (and it seems that this movement is unstoppable) but still wants to do so without bankrupting our economies or rely on immature technologies, there is no alternative to LNG.
Then again, its still expensive feed-gas from the US. And its feed-gas risk which is pretty unseen in the LNG world. One of the safe bets an LNG project manager was able to build his project on was a very stable feed-gas price. With feed-gas bought at market rates, a level of complexity comes to an already pretty complex world.
North America is the beacon of LNG because of the LNG for fuel movement. Even without LNG exports, this will still be great. Really great.
This artcile went ahead and made my day.