Book Review: "LNG Markets in Transition"
The liquefied natural gas industry could be nearing a ‘tipping point’ where supply contract durations shorten to a decade or less and pricing terms reflect spot market conditions, according to a 600-odd-page book published this month, written jointly by the OIES and Kapsarc*.
With so many uncertainties – technological, regulatory and commercial – hanging over the demand side, long-term contracts will be less attractive to the usual buyers, who can no longer guarantee they will be able to find a home for the gas. Other fuels and other suppliers may be able to deliver the energy to the end-users more cheaply than they can.
Suppliers will be reluctant to take final investment decisions without these guarantees unless banks adjust their way of thinking, in this new world of low-priced energy.
“The next wave of LNG projects may move forward on the basis of sales and purchase contracts of no more than 10 years; especially if they are lower cost expansion or conversion floating LNG projects,” the authors say. “Up to 2020, however, the industry is set to embark on a period of phenomenal change, growing in size by half, adapting to new ways of operations and trading, pricing and contracting with new companies; all of these changes will continue to challenge the industry’s traditional standard practices.”
Asking whether new projects can proceed in today’s low-price environment, it says that there are four preconditions: spot and short-term trading becomes the norm; reliable benchmarks emerge and hubs develop; upstream costs fall substantially; and lenders become comfortable with the fact that in a liquid market, customary long term contracts and long-term contracts selling at a spot price are almost equivalent.
While there is no shortage of hubs in the west, there are none in Asia**, and the supply of gas to end-users there is for the time being restricted to a limited number of importers. But this could change.
The authors say "there is enough shipping capacity to support the growth of the spot market and optimising shipping will also free up LNG carrier capacity. Meanwhile the rise of spot markets triggered by portfolio sellers and buyers with destination flexibility... means that neither party is interested in predictable tanker routes any more."
The authors calculate some $2b/yr are wasted in inefficient shipping routes, but collusion between sellers on which vessel is to deliver which contracted cargo could raise competition concerns.
William Powell
*LNG Markets in Transition: the Great Reconfiguration, eds. Anne-Sophie Corbeau, David Ledesma, (c) Oxford Institute of Energy Studies & King Abdullah Petroleum Studies and Research Center, pub. OUP ISBN 978-0-19-878326-8
** Although Asia has no real gas hubs today, several attempts to launch them have been made and, as this blog from international law firm Freshfields argues, eventually one may succeed: http://knowledge.freshfields.com/en/global/r/1524/recent_moves_towards_gas_trading_hubs_in_asia