Producers, Traders Respond to LNG Growth
Strong demand and the development of the global LNG market are changing major oil and gas producers, a panel of senior executives said at Gastech in Barcelona September 18.
The abundance of US LNG and thirst of Pacific markets in particular are forcing changes on the global LNG market and its players. The need of producers to finance new projects and capture more value is driving increased liquidity, transparency, efficiency and portfolio expansion downstream.
As producers race to keep up with booming demand, they’re finding investors and lenders are wary of working in the dark. Shovelling cash into a $230bn commodities segment where a liquid spot market is in the early stages of development and remains handicapped by a lack of transparency is an issue for many.
“The size of our portfolio gives us and customers lots of flexibility,” says Steve Hill, Shell executive vice president for gas & energy marketing & trading: “But there’s bigger value in launching new business and long-term projects.”
There’s greater and greater benefits for LNG producers in efficiencies of scale, agrees Michael Sabel, Co-CEO at Venture Global LNG, but that makes them lumpy to execute: "Investors financing don’t know if the market will make a mistake on output predictions. You need investors ready to take a very big risk. Liquidity will help.”
Transparency is key to developing that liquidity. The $230bn LNG market is used to operating on opaque long-term contracts linked to the price of oil as a basis for funding new projects.
As the market expands, however, that’s no longer sufficient. Around 25% of LNG is currently traded on spot markets, but that has to change they panel agrees.
“You can produce oil or power and simply sell it into the market, accepting the market price,” says Andree Stracke, RWE Supply & Trading's chief commercial officer: “LNG must get to that point.”
For that to happen, spot trading needs to increase, and price indexation needs to be better aggregated across the market to allow quicker deals that will improve liquidity.
Customers are also becoming more demanding says Massimo Mantovani, Eni's chief gas & LNG marketing and power officer: “It’s a changing world and LNG is becoming more difficult to sell. We need to offer more flexibility and different types of contract. There’s no longer a queue of people lined up to buy gas in just the way you want.”
All change
That means these giant companies have to change not only how they draw up contracts, but also strategy and structure.
Mark Gyetvay, CFO for Russian producer Novatek, says his company’s strategy hopes that improved transparency and liquidity will bring prices down. “We’re looking for volume growth not price growth,” he announces: “We need an LNG price that supports demand growth.”
With pricing hoped - and expected - to drop as volumes mount, upstream operators will increasingly seek greater efficiency. Surprisingly, however, the panel largely dismisses technology as key to that drive.
“There’s probably more to be gained from doing the conventional things more efficiently,” suggests Shell’s Hill. “The focus is changing from being first to being more cost efficient. We have benchmarks now which let projects see where they need to be on costs.”
They’re also seeking to tap into the full value chain. Novatek’s LNG is currently marketed by Total, the French major having recently joined the likes of Shell in changing its business model to become a portfolio player. Novatek will likely join them in the move downstream, Gyetvay notes.