The Alaskan & Canadian LNG Sagas Continue Amid International Market Turmoil
 
Commentary by
Dave Harbour
 
From our mid-Atlantic oil and gas analyst friend comes his comment on two articles addressing the global LNG market.  
 

Commentary:

As chance would have it, our Aussie oil and gas analyst friend also commented on the Bloomberg article noted column-right, and below is his comment on LNG competition.  

These two observations from two different parts of the world, from two objective observers, should sober up some of our Alaskan and Canadian public officials.  

We are referring to those elected officials who have looked at LNG not as a massive, good, free market project–but as a goose to cook before it could lay its golden eggs.

-dh


Over the weekend The Australian Financial Review (AFR) picked up on a Bloomberg story about the current woes facing the LNG supply market.  As this blog has noted constantly, that market is currently very long.

The extent of this length was captured in this news story very effectively through the statistic that only one in twenty of the world's currently mooted LNG projects is actually required to meet market demand by 2025 (according to respected energy consultancy IHS).

To be one of those five, a project is going to have to very competitive.  Given the usual competitive advantage that brownfield developments have, greenfield projects, particularly in higher sovereign risk locations, look like they will be pushed out for potentially decades.

All of our international references and commentary have as much relevance to our Canadian as to our US readers.  

 
This is true for several reasons: 1) Before the shale revolution (i.e. the worldwide abundance of gas), the North American gas market pretty much revolved around Henry Hub.  International markets often used some market basket formula of oil prices upon which to base 20-year gas / LNG contracts.  More and more, LNG has become the great equalizer and the current pricing standard in favor seems to be spot market pricing–in some cases based on Henry Hub.  2) Today's energy marketplace finds Asia-landed LNG prices this summer/fall that are half the prices 20 months ago–or less.  3) The gas shale boom resulted in an LNG project boom.  Due to low prices, many of the projects are on hold or have been discontinued.  Even so, a number of new plants are either now opened or soon to commence operations.  4)  It is into this brave new world of international LNG competition that the Alaskan and Canadian LNG projects hope to compete and win.  5)  The international turmoil extending from the Chinese South China Sea islands, to Russian hegemony in Europe and Syria along with Islamic terrorism everywhere adds an additionally concerning risk to all large, international capital projects.  6)  Canadian projects have been plagued by demands of local stakeholders but helped by B.C. legislation.  The Alaskan project is plagued by extraordinarily high capital costs.  It also must consider an unsustainable state budget deficit that stimulates more "Tax Big Oil" populist rhetoric, and an administration which daily grows more hostile to its major investors: the oil & gas industry.
 
Our conclusion: Alaskan and Canadian governments had better put minimal demands upon and maximum support toward LNG projects that could provide jobs and economic vitality to their regions for generations to come.  
 
We urge elected officials everywhere to remember the maximums that, "while he who has the gold may make the rules," it is also true that "100% of a failed LNG project is nothing."
 
With these factors in mind, we think our astute readers will find more data points in our friend's observations, below.   -dh


Our mid-Atlantic analyst friend first references a Bloomberg article, ("85 gas projects dying on the vine as LNG’s promise falls short​"),  that focuses on just how many projects around the globe are likely to be superfluous, if built. The biggest potential source of unneeded projects is in Canada, due in part to likely delays in completion if they are actually constructed. The second largest source of projects that are either shelved or uneconomical if built are in the US.

·        The second article, from this week’s Platts Gas Market Report, summarizes arguments by LNG export executives as to why the skeptics should be considered wrong. Maybe it is just a cloud in the mind of this writer, but the bases for their points appear sadly devoid of logic or substance. If we read them correctly, they have three main points:

1.  The European market may provide a source of demand in the future. There may be some increased future demand (but far into the next decade), but only if the price stays abysmally low. And this is hardly the point of chasing market differentials.

2.  Supply will create demand. But again, the price has to stay low, which means that a lot more cost has to come out of the average (not marginal) cost of production. And this will also be back-ended, and free of twenty- year contracts.

3.  Analysts have been wrong in the past, so they must be wrong this time.          Actually, the quote is: “ if you look back, there weren’t that many consultants that ever really forecast many things right when they happened.”  

I suppose this also goes for the analysts that forecast a huge growth in global LNG demand a few years ago. Enough said on this sad support comment for their position.

Our opinion is that the Bloomberg article actually understates the amount of capacity currently being considered that will be excess, if built, for at least the first few years it hits the market. The big question, in our mind, is just how overbuilt the market will become over the next ten years? If, in fact, twenty-year take-or-pay contracts are no longer the norm, how many LNG developers will find a way to fall victim to a variant of the Orlando Hotel Syndrome?