The Great LNG Race: Who will be the winner?
Guy Broggi, Senior Advisor LNG, TOTAL has been in the LNG business since 1986, including postings in Jakarta, Tokyo, Buenos Aires, London and Aberdeen. Since 2006, Mr. Broggi has been located in the company's headquarters in Paris.
He offers, “Lately, I've been involved in building the LNG desk at the trading arm of TOTAL called Total Gas & Power Ltd in London which is in charge of selling and buying commodities, mainly selling the E&P gas productions and monetizing our portfolio of natural gas.”
Natural Gas Europe had the privilege of speaking with Mr. Broggi, who offered his views on the winners of the LNG race, volumes making their way to European shores, and what fuels a “gas economy” among other topics.
Natural Gas Europe: Mr. Broggi, your job must be incredibly comprehensive with so many different markets to monitor and so many dynamics involved – could you speak about a couple of places that are high on your radar screen?
Guy Broggi: The Fukushima disaster (2011) turned Japan into the #1 consumer of LNG by far in the last few years, consuming, in 2014, almost 90 million tons of LNG in a worldwide market of 240 million tons – just Japan!
This situation led to high prices for LNG, because there was a huge, unexpected demand at a time when crude oil was also very high – US$ 100/barrel. (LNG prices in Asia are traditionally linked to crude oil import prices in Japan, known as “JCC” for “Japanese Customs Cleared”, an indicator published monthly by M.O.F. of Japan)
More recently we have witnessed a very different situation price-wise, because the price of both crude oil and LNG have landed in the region of US$ 50-55 for oil and something like US$ 6-7/MMBtu, for LNG, when it had reached US$20/MMBtu before! (February 2014 to be accurate).
This new development has obliged the candidate suppliers of future liquefaction projects to re-assess their projects. One must understand that a liquefaction plant can cost between US$15-35 billion and takes 5 years to build, thus the need to pre-sell production to potential customers wherever they are located. Now the trend is that there are more suppliers’ projects than all buyers can absorb and/or are willing to commit long-term.
The new reality in LNG is, "long-term" is becoming "medium-term"; or even "short-term". And Buyers are requesting more flexibility due to the lack of certainty as far as future demand is concerned.
In contrast to natural gas, LNG is now considered a global commodity – could you explain why?
The LNG business started mainly in Japan, Korea and Taiwan, because these countries have no access to pipeline gas whatsoever, so it was natural that discoveries in Malaysia, Brunei, Australia, Indonesia – the biggest ones at that time in the 70s – were dedicated to buyers also called “utilities” in these three countries. This was a perfect fit at that time!
In the 90’s, the US and Europe started to search for LNG imports, permitting the launch of liquefaction projects from Atlantic Basin and the Middle-East, along with a flurry of LNG receiving terminals both in the US and Western Europe.
Today, in North America- US and Canada- there is plenty of natural gas available at an affordable price (less than 3$/MMbtu) and they use it as a domestic fuel – Which is the natural and traditional way of using natural gas, by the way!
In Europe, we have been using natural gas for years from the North Sea, Russia and North Africa. Recently, after the decline in UK production, the UK and Western Europe started to build quite a few LNG import terminals: France, Spain, Portugal, Italy, UK, Belgium and The Netherlands, Greece and Turkey, every country wanted to have the access to LNG. So now Europe is able to import LNG to balance out the decline of domestic production on the one hand, and compete with imported pipe gas from the traditional sources on the other hand.
The newcomers – India and China – have an appetite for this type of fuel, because they want to replace coal by something which is cleaner in terms of air quality. So they've started to build receiving terminals and sign long-term contracts for LNG with several suppliers from Australia and Middle-East mainly.
On top of that, now you have all sorts of countries, from Dubai, Kuwait, Lithuania, Chile, Argentina, Brazil, and more recently Egypt and Jordan and Pakistan, which have opted for this fuel, mainly for power generation but sometimes to compensate their domestic production decline as well. This trend has been permitted by the quick fix that represents the use of FSRU, Floating Re-gas Unit, instead of the costly and lengthy process of building a land-based LNG terminal.
In many areas of the world, on the buyers’ side, there is a genuine demand to replace or complement pipeline natural gas with LNG coming from any part of the world, from a variety of counter-parties – this is what we call the “commoditization” of natural gas through LNG.
Natural gas could become a commodity in the future only through the liquefaction process, because as a liquid you can ship it on special dedicated ships that can reach any part of the world from any source where you have a liquefaction plant. And there starts to be a certain number of these already.
How much do you think having available volumes, potentially lower prices could fuel a gas economy in some places around the world?
In North America, from Alaska to Mexico, there is so much cheap gas: US$ 3/MMBtu. This is displacing coal in power generation and may displace crude oil production in transportation – this remains to be seen, but it's starting to be a reality. The US has also witnessed a return of industries which need gas as feedstock from overseas, just attracted by the low price of such feedstock.
In Europe, natural gas is not always the preferred fuel today! Even if it's the cleanest fossil fuel, its usage is limited in France by nuclear; in Spain, by renewables and locally-produced coal; in Germany, by renewables, lignite and imported coal while the UK uses a mix of everything. Italy is an exception and natural gas is a fuel of choice there.
So, paradoxically, Europe is not viewed as a great place for natural gas demand growth, and every source, be it from the North Sea, Russia, Africa, or LNG, will have to deal with a market which is stagnating at least for the foreseeable future.
In Japan, Korea, Taiwan, for which gas imports are 100% LNG, buyers are now realizing that the price is more palatable for them at $7/MMBtu than at $20, and in order to maintain that low energy price they are still playing the fuel competition game by developing renewables, nuclear and “clean” coal. Again, natural gas has to make inroads into the fuel mix and beyond price the environmental quality of LNG is a key element for that.
In India, domestic natural gas is relatively “cheap” (government fixed price), so if you want to enter this market the import price much be competitive with such “cheap” domestic gas on top of coal and “naphta”- oil condensates.
In China, in order to promote domestic production, a fairly high level of price has been established which recently lead to a lack of demand growth, making it difficult for committed quantities of LNG to access the downstream market unless adjustments are made. Chinese national companies may be over-committed as they were requested to commit long-term in order to get government approval to build their receiving terminals.
The big LNG suppliers will remain: Qatar; Australia, which will overtake Qatar in the next couple of years; the US, which is coming on strong; and further afield, Canada/Alaska; not to mention Russia, which has now entered the race through LNG as well as pipelines gas.
What's at stake in the race for completion of new LNG liquefaction facilities?
The LNG race is a big competition between producers from Alaska, Canada and the US against those from Mozambique and Tanzania, where big discoveries are waiting to be monetized; Nigeria, where there's still a lot of gas to monetize as well; Russia, which counts several projects on the drawing boards of big companies like Gazprom, Rosneft and Novatek; and of course, Australia and PNG, which still have plenty of undeveloped gas resources.
Among these projects, some are already decided and are under construction and they will enter into production from now to 2020,. But the others are on the waiting list.
There's a lot of LNG coming online and we hear of the “supply glut”, but also of contracted volumes making their way to Europe. Considering the price differential with Asia, could you explain why LNG would come to Europe, or why it would go to Asia?
Usually, rationally-speaking, Australian and Indonesian productions should remain in Asia, because transporting LNG is costly, while Nigeria or Africa productions should remain in the Atlantic basin, which is Northwest Europe and South America now. Future US exports should target, naturally, Latin America: Brazil, Argentina, Chile plus new demand from the Caribbean islands and Europe, of course!
All of that would be in an ideal world.
One must notice that the LNG business is operated by big actors; countries are one thing, LNG actors are another and their vested interests are not always aligned. Big actors – like utilities in Japan – have planned already for 2020-25, so they are covered until then. Candidate suppliers have to target this timeframe and there will be opportunities at the time of contracts renewals as well. Thus the race!
In Europe, there is no such thing as LNG demand; LNG can replace pipeline gas, and it's up to the big utilities like Centrica in the UK, RWE and E.ON in Germany, ENGIE/GDF in France, or the Spanish utilities in Spain and ENI everywhere to choose to buy LNG instead of drawing on pipe gas from LT or spot contracts with Norway or Russia or Algeria. We call it a “call for LNG”!
Because of existing Hub prices in Europe, LNG new imports cannot be priced differently than pipeline productions. LNG has to take the Hub price (NBP, TTF, Peg-Nord, Peg-Sud) in countries where such hub exists. (Legacy contracts however are still priced against crude oil products as was the case for pipeline long-term contracts)
You've mentioned Lithuania's regas terminal, and the Polish facility is set for operation soon. If we consider the liquidity of gas in North-western European markets, how feasible is the LNG alternative for things like diversification in Central & Eastern Europe or South-eastern Europe?
It's already a fact. You have plenty of trucks every day loading LNG in Zeebrugge in Belgium or in Rotterdam GATE terminal and delivering the fuel for customers along the road up to Poland, at a time when this country is awaiting the opening of an LNG terminal that will receive long-term supplies from Qatar– Q1 2016. Lithuania is already supplied by Statoil, probably from Snøvhit in Norway, so in the Baltic area the competition is already there. In other words, there is no longer a Russian monopoly and it's up to each company to try and find the best LNG possible to make their business palatable for their clients.
There's a new trend in the Baltic area: bunkering with LNG. It's just starting, but I'm a firm believer in its future. Due to air quality compared with heavy fuel-oil and even gasoil, LNG has a bright future in bunkering in the North Sea and Baltic area, where some harbours are already putting money into bunkering facilities for LNG. It needs a bit of investment but it is coming. The EU commission is also helping the building of infrastructure, with EU funds.
How do you see the North American suppliers taking advantage of such potential new buyers in Europe?
They are already doing it. The 50 million ton-plus capacity already under construction has been subscribed by Centrica, Gas Natural Fenosa, Engie of France, Total, EDF, etc. in addition to Japanese or Korean buyers, some of whom have taken the risk of committing to volumes from the US, while many portfolio owners in Europe have been doing the same. So it's a done deal. In this respect you will notice that some Asian companies are already trying to de-risk their US positions by re-selling part of their contracts (GAIL with Shell) or swapping their US quantities with portfolio owners (Kansai Electric with ENGIE). We are entering a phase where physical deliveries may change course of destination more than once in the future. It’s traders’ moment in LNG actually.
What are some of the main considerations in signing such contracts for US LNG supplies?
You have three kinds of players:
1. The utility close to its clients – they have real needs, are able to predict future demand, must be prudent, but still can commit volumes on a long-term basis: the Japanese or Korean utilities are an example. In places where there are monopolies it's easier because they can plan their future demand. (No longer the case in Europe where free access to a liberalized market has increased competition between historic national champions)
2. In competitive areas like Europe now, players like Centrica, ENI, ENGIE and E.ON, etc… are competing in several countries so it's up to them to build a flexible portfolio to back their downstream markets. Utilities have become “portfolio” managers.
3. Other big portfolio owners that are not utilities, but buy and trade like Total, BG, Shell, BP have been building flexible portfolios in order to be able to tackle any situation in the future. These are IOC’s which supply LNG to the world from their numerous projects in countries where they share the venture with local national companies (Russia, Qatar, Nigeria, Indonesia and Malaysia).
Could you tell us about some of Total's most interesting LNG projects?
Total has been in this business from the very beginning, starting with Indonesia and Abu Dhabi. We have been among the first players in Qatar and have been in Oman in the early stage. We're one of the shareholders of Norwegian LNG. We're also in Angola, Nigeria and Yemen.
We're a one of the global players along with Shell, BG, BP, ENGIE, etc…
Now we've got also competition from ExxonMobil and Chevron, who are moving forward fast and will be bigger players in the future. So this means that Total has to keep its portfolio agility and its relationship with its buyers in order to stay in the race and to grow.
On top of our current projects in Australia (Ichtys and GLNG) we are contemplating a new project in Papua New Guinea and we are involved in the Russian project “Yamal LNG” with Novatek of Russia.
Finally, Mr. Broggi, who will be the winners in the LNG race?
There will be more than one winner. It's a difficult situation today, because there is a lot of flexible LNG around and buyers would prefer not to commit to long-term contracts; they are happy with keeping short-term views: When the vision of the future is uncertain, you're better off being flexible – that's obvious. “Flexibility” will be the master word of the years to come!
So the first commitment for projects targeting 2025+ in my estimation will come from Japan, because they have to sustain at least the same type of LNG import they have today by replacing the existing contracts with volumes which may depend upon their view on nuclear retsart. I guess that Japan will probably give a chance to one or two projects like in the West coast of North-America or Sakhalin because they are well located and could make sense geo-strategically. For political reasons, they can play with 2-3 more projects with FID to be taken in the next 3 years, but sellers will have to be happy to sell with buyers’ new conditions: more flexibility, prices which are compatible with other fuels, etc.
As for the new type of buyers – more “short-term” like Europe, the Middle-East or South-America – they could wait before committing long-term again, but there could be risk-takers around there ready to launch projects with a shorter perspective, provided they can find financial institutions to back their projects. This is mainly the US export-type of project.
-Drew Leifheit