Tough competition expected among new LNG projects
March 4, 2014
Bill White and Office of the Federal Coordinator, under leadership of Larry Persily, provide a useful service to government and industry with scholarly essays on issues and facts related to disposition of Alaska North Slope Gas. In this piece, White carefully analyzes various aspects of Alaska LNG competition.
HOUSTON — Too many potential liquefied natural gas export projects are chasing the expected strong growth in Asian gas demand over the next 15 years, a consensus of speakers said at a recent LNG conference.
"There will be a lot of North American projects still waiting in 2030," predicted Daryl Houghton, LNG consulting manager with Poten & Partners, a global energy consultancy. LNG plant development has always gone through busts, booms and "projects waiting in the queue."
The LNG world has plenty of potential suppliers post-2020, agreed Robert D. Stibolt, senior managing director at Galway Group, an energy advisory firm with offices in Houston and Singapore. "It's just a question of who will come on and who will be deferred."
Houghton and Stibolt spoke at the Platts 13th Annual Liquefied Natural Gas conference Feb. 20-21 in Houston. Conference topics ranged from the status of proposed North American export projects and their possible impact on global gas pricing to projected demand from different regions of the world.
But some of the key interplay among presenters during the two days sprang from a comment by the conference's first speaker:
Asia-Pacific annual LNG demand will grow by about 165 million to 175 million metric tons by 2025 — roughly double today's demand, said Asish Mohanty, senior analyst for global LNG research at Wood Mackenzie. That new demand — averaging about 23 billion cubic feet of natural gas a day — could require construction of a dozen or more new large-scale LNG export terminals over the next decade.
But Mohanty said new LNG projects under discussion — totaling 555 million metric tons per year in potential capacity — could fill that forecasted demand three times over. (He noted some are projects actually on the drawing boards and some are "projects" more at the dream stage.)
Some speakers who followed weighed in on the Wood Mackenzie forecast with their own outlooks.
Houghton of Poten & Partners said 370 mtpa in projects are vying to provide 130 mtpa in new LNG supply by 2030 that today's existing or under-construction plants can't meet.
Ed Ridzwan, assistant marketing director for Qatargas Operating Co., said an additional 155 mtpa of LNG capacity not yet sanctioned for construction must be built to meet forecasted demand for 2025. That is more than 20 bcf a day of new supply.
The proposed— sponsored by ExxonMobil, BP, ConocoPhillips, TransCanada and the state of Alaska — would produce 15 to 18 mtpa.
Stibolt of Galway, speaking toward the conference's end, came in as voice of calm on whether an LNG supply glut looms for the 2020s. Projects that aren't needed won't be built, he said simply. Supply and demand will balance. That is the LNG industry's history. That will continue to be its story, he said.
Demand is tricky to predict, Stibolt noted. Variables include prices, coal- and nuclear-power plant retirements, and technology advances on both the supply and demand sides.
But Stibolt believes global LNG demand will be strong enough to support North American exports.
He didn't think a glut of U.S. exports, with prices tied to generally lower U.S. natural gas prices, would end the era of generally higher oil-linked LNG prices in Asia. But Stibolt said the actual link — called a "slope" — in the oil-pricing formula would angle down to a lower level as both the U.S. Henry Hub index and United Kingdom's National Balancing Point index get incorporated into prices in some Asian contracts.
WILL LIQUIDITY MATTER?
Another factor in the 2020s could help ease high oil-linked prices. The decade likely will see new LNG supplies sail to market from the United States, Canada, Russia, East Africa, Australia and elsewhere. At the same time, consumption likely will be blossoming in such hungry economies as China, India, Singapore, Thailand, Indonesia, Malaysia, the Middle East and South America.
With more suppliers and more buyers in the 2020s, the gas market will have more options for its players, or as economists say: More liquidity. That should result in lower prices, Stibolt said.
Two days before the Platts conference began, a Houston-based economist at Rice University's Baker Institute for Public Policy issued a paper that made just that point.
"As the U.S. begins to export LNG, the global market will deepen and become physically linked to the North American market, the most liquid natural gas market on the world," said Kenneth B. Medlock III in his paper "."
"As natural gas becomes an increasingly fungible commodity, which would be the case as the volume of global natural gas trade increases, the pricing paradigm of oil indexation will come under increasing pressure," he said.
Medlock noted change could happen surprisingly fast. "After all, the rise to current price levels in Asia relative to prices elsewhere happened in only six months, a fact often forgotten in the discussion about future pricing in Asia."
THE LOWER 48'S LURE
At the Platts conference, Kunio Nohata, executive officer and senior general manager of gas resources for Tokyo Gas, said the new LNG projects that could emerge in the 2020s would give his company a more diverse set of possible suppliers. That would meet an important strategic goal for Tokyo Gas. The new supply regions he named included Africa, Canada, the U.S. Lower 48 and Alaska.
Lower 48 purchases at prices tied to the Henry Hub — a South Louisiana junction of many gas trunklines — "is very interesting to Japanese buyers" because of the price-setting transparency there, Nohata said. Henry Hub pricing might not result in the lowest price in Japan, after adding liquefaction and cross-ocean shipping costs. But adding it to the pricing mix will help Japan toward its goal of establishing a transparent and liquid LNG market in Asia some day, he said.
Japanese buyers, Nohata said, also like that Lower 48 LNG purchases will be allowed to be delivered to any LNG receiving terminal — called destination flexibility. That is different from traditional LNG contracts that require cargoes to sail only between a given LNG plant and receiving terminal. Destination flexibility would allow buyers to manage their LNG portfolios better, with the goal of paying lower prices.
HOW DOES CANADA COMPETE?
Bill Gwozd, senior vice president of gas services for Calgary-based consultancy Ziff Energy, said 16 proposed projects that would export Canadian gas — 14 in British Columbia and two in Oregon — are competitive with U.S. Gulf Coast plants. The gas and liquefaction would cost more in Canada but that would be offset by a lower shipping cost because of the shorter distance to Asia, he said.
Canadian gas could get to Tokyo Bay for $10 per million Btu, he said. It's the lowest possible price, "the Walmart price," he said.
"These projects are economic." The gas reserves are ample. The technology to build seven or eight pipelines across mountains to the coast exists. "There's nothing to stop any project," Gwozd said.
Others speakers were less rah-rah about Canada.
Canadian gas will cost close to $12 to deliver to Asia, said Houghton of Poten & Partners. The pipelines will be challenging to build. The LNG plants in remote areas will be more expensive than Lower 48 plants, he said.
Mohanty of Wood Mackenzie said Canada has significant technological challenges along every step, from its tight-gas and shale-gas fields, to its pipelines (as long as 465 miles to the coast), to its LNG plants. On top of that it has First Nations issues to resolve with the British Columbia aboriginal communities. The Canadian projects will get built eventually, he said, but it's unclear when.
In addition, industry is reacting coolly to British Columbia's proposed new tax on LNG exports, which the government outlined two days before the Platts conference began. The tax would range up to 7 percent of net income after capital-cost recovery. The provincial parliament is expected to take it up this fall.
Mohanty said that among proposed projects that await final investment decisions to construct, only some in the Lower 48 and Russia seem likely to actually be producing LNG by 2020.
THE TIME IS NOW
The time is now for Lower 48 plants, he said.
Lots of upstream gas is available. Buyers are attracted to Henry Hub pricing and destination flexibility. In many cases, liquefaction trains would be add-ons to underused LNG import terminals, so the projects can be built relatively quickly. Labor supply to construct them likely is available. These plants are a good medium-term supply option for buyers.
But longer-term, it's harder to see the Lower 48 plants holding their advantages, Mohanty said.
Other projects could get built that are closer to Asia markets, including in Russia, Canada, Africa and possibly a second wave of construction in Australia. For now, Australia's reputation is tarnished by big cost-overruns and delays on the first wave: seven projects under construction today, he said.
Wood Mackenzie ranked each region relative to the others on political risk, market proximity and supply diversity for the 2020s. Canada scored good straight across. Australia scored good on political risk and market proximity but poorly on supply diversity. East Africa ranked good on supply diversity, but political risk challenges its projects — little to no supporting infrastructure and rudimentary government fiscal and regulatory regimes handicap development of a tremendous gas resource, Mohanty said.
Mohanty was skeptical of Alaska LNG's prospects for the 2020s. Challenges include building an 800-mile pipeline, and the state's fiscal regime is uncertain "despite recent activity," he said. Assembling a $45 billion to $65 billion project takes time, and the Alaska project is in competition with many other projects for a limited window of opportunity, not to mention the big price tag itself, he said.
"By the time the Alaska project is ready for the world, the world may not be ready for it," Mohanty said.
NORTH AMERICA VS. REST OF WORLD
Houghton of Poten & Partners thinks North America projects will get half of the new Asia demand through 2030 — or 65 mtpa of demand. That leaves a lot of projects on hold: The U.S. has 140 mtpa in projects proposed that could succeed and Canada 90 mtpa, he estimated.
The U.S. projects that are merely adding liquefaction trains to LNG import terminals have a 20 percent cost advantage over "greenfield" plants that must build the piers, storage tanks, utilities and other facilities from scratch, Houghton said.
The plants that are moving fastest through U.S. regulators — including the Sabine Pass, Lake Charles and Cameron projects in Louisiana and the Freeport project in Texas — already are approaching 65 mtpa in nameplate capacity, leaving room for just one or two more North American plants, he said.
Projects in the rest of the world will supply the other 65 mtpa in his forecast. Houghton thinks Russia is positioned well, as it can deliver LNG to Asia for about $11 per million Btu — roughly midway between his estimates for the Lower 48 and Canadian delivery.
New plants will bring new pricing to Asia LNG, but oil-linkage will remain a strong component of the price formula, Houghton said. Perhaps a hybrid will develop that will be weighted 80 percent to oil via the Japan, or JCC, and 20 percent to Henry Hub, he said.
Will the gap between high Asia LNG prices and lower European and North American gas prices close?
"I don't think so," Houghton said. "Will it diminish? Yes."
Poten & Partners sees more hybrid formulas in price negotiations. Perhaps the LNG projects that succeed in the 2020s will be those most willing to accept new pricing methods, he said.
BP today announced its intention to establish a separate business to manage its onshore oil and gas assets in the US Lower 48.
Comment: Yesterday we noted that two legislators are planning for a new oil revenue stream should voters adopt an August Primary Ballot proposition to repeal oil tax reform.
That revenue stream will be based on a new policy emphasis on state investment and equity into oil and gas exploration and development projects. These are the same minority legislators who are leading an effort to repeal the SB21 oil tax reform bill passed by a majority of the House and Senate, and signed by the Governor, less than a year ago.
We can now see a strategy rising from the mist: repeal of tax reform will have to be replaced by something that produces revenue. Since repeal of reform will deflect investment, an unhappy but obvious policy replacement would be to socialize/nationalize natural resource industries...starting with the small step of massive equity investment of public funds and employment of state employees to oversee the profitability of the investments.
What could possibly go wrong?
Today, we hear in a Fairbanks News Miner editorial, that certain Mayors who reap large and mostly passive benefits from the oil and gas statewide property tax, are mounting an effort to investigate impact on their revenues from an agreement between the state and gas pipeline parties regarding the fiscal regime enabling a gas pipeline project to proceed.
Certain gubernatorial candidates oppose both oil tax reform and the fiscal terms surrounding a gas pipeline project.
The current governor supports both tax reform and the proposed gas pipeline fiscal regime.
While there seems to be alignment among major gas pipeline and oil tax stakeholders, lack of political alignment from other, vocal influence leaders could well cause oil tax reform to disappear after August, soon to be replaced by new statewide leadership and a new world of natural resource control by bureaucrats and government ownership of the 'means of production'.
Should this be the outcome, we can envision great impact, as well, on Alaska's entire investment climate, not merely limited to natural resource investors. -dh
Comment: Fox News interviewed former Alaska Governor Sarah Palin (NGP Photo) today.
During the interview, we learned that Candidate Obama opposed Candidate Romney's conviction that Russia posed a global threat to peace.
The program also produced a video of Candidate Sarah Palin, earlier warning that just as Russia invaded Georgia it could as easily invade Ukraine.
Throughout the interview, Palin emphasized the importance of approving the Keystone XL pipeline and developing domestic energy resources with Administration support--rather than Administration opposition.
Our faithful readers know that we have been hard on Palin for her Alaska oil tax and gas pipeline policies nearly a decade ago...but in this interview we found ourselves appreciating her message, which we paraphrase: "Develop America's resources aggressively and responsibly now, Mr. Obama, or watch our standing in the world and support for our allies diminish along with our national security and economic recovery."
We also note from the current issue of Petroleum News, that "Commissioner John Norman (NGP Photo) retired from the Alaska Oil and Gas Conservation Commission at the end of January. Norman, an attorney, had been the public member of the commission for 10 years. He was named to the commission by former Gov. Frank Murkowski in 2004, replacing Sarah Palin as the public mem...." (We are reminded once again of what a small world it is as we congratulate Governor Palin on her stand for domestic energy production and her replacement, Commissioner Norman, for a lifetime of service to the state and nation. -dh
Wall Street Journal by James Freeman
WARREN BUFFETT, CLIMATE-CHANGE DENIER
The billionaire chairman of Berkshire Hathaway (Photo, Buffett with NGP Publisher) is on some kind of roll. Yesterday we told you about his warning on public pension funds in his annual letter to shareholders. Now, he's puncturing deeply-held liberal myths about global warming. Mr. Buffett tells CNBC that extreme weather events are not becoming more common, and that climate change is not altering his company's calculations when insuring against catastrophic weather events. "The public has the impression that because there's been so much talk about climate that events of the last 10 years from an insured standpoint and climate have been unusual," he said. "The answer is they haven't." (We commented on the subject of climate change two days ago, invoking Aristotle's Golden Mean ideal; and we challenged both sides of the debate). -dh
Comment and link: We earlier commented on LNG competition.
Here, Peter Tertzakian of the Globe and Mail gives further insight on the softening LNG market for British Columbia exports. Are not some of Canada's LNG export concerns ones that we Alaskans share. In both Alaska's land Canada's cases, LNG market demand and competition are exacerbated by local political interests striving to obtain for themselves and their constituencies all possible benefits -- even if the end result is achieving 100% success in gaining benefits for projects that became embroiled and then doomed in a sea of local and national political struggles.
To quote our reference at the Globe and Mail: Japanese benchmark prices for LNG in Asia have been exceptionally high since the Fukushima nuclear disaster, almost exactly three years ago. Concurrently, domestic Canadian natural gas prices have been anomalously low. The resulting “differential” between the two was $15.70 (U.S.) for one million British thermal units (MMBtu) at its widest in July, 2012. It’s been that massive price gap, or arbitrage, that triggered the buy-low-sell-high opportunity to build LNG export facilities in North America, including 14 projects off the west coast of B.C.
Peninsula Clarion (Morris News Service/Alaska Journal of Commerce), by Tim Bradner (NGP Photo, at Nikiski LNG Terminal).
Minority Democrats in the Legislature unveiled their vision of an oil tax system should voters this summer roll back the tax structure lawmakers approved last year.
. . .
“There are (state) entities around the world that own a share of their oil industry (through state oil companies) and I have confidence that we have the ability to do this,” said Sen. Bill Wielechowski (NGP Photo).
. . .
“The governor’s giveaway is a pathway to poverty,” said Rep. Les Gara, (NGP Photo), said in the press conference “He throws two billion dollars out of an airplane and hopes it lands in the piggy bank....”
Dear Readers: We have documented excesses in policy and deficiencies in decision making owing to the 'global warming' faith crowd.
Still, we must prize facts and science over politics in our search for 'Endless Progress'. In this spirit, we ask our more knowledgeable friends to help us with a response or rebuttal to this reaction to Ferrara's commentary. -dh
(Our Comment: The Obama Administration departments -- including DOD -- base many changing policies on a bureaucratic faith in the siren calls of global warming.
Upon the "environmental protection/global warming" assumptions are based programs causing vast damage to American employment, economic health and national security--while building big government bureaucracies and political dependencies on the Executive branch.
This explains why the Administration and its allies will fight to the death to impugn the reputation of global warming critics. After all, if the climate is actually growing cooler or simply cycling through another historic period of 'cooling/warming', how can government justify its damaging policies?
Ferrara's Forbes column may represent an inconvenient truth to disciples of global warming--but integrity demands that we hear a response to the challenge laid out in the box above. After all, even if it can be shown that warming is a long term trend, we would still demand -- in the name of science -- proof that mankind (and not the oceans, etc.) were the major contributor of greenhouse gasses.
Then, if man is proved to be the principle cause, is America wisely adopting policies that are reasonable and do not threaten to bankrupt the country while major carbon producers in the developing world are making little to no effort to contain carbon output?
Lastly, even if the United States (i.e. with over $17 trillion dollars in short term debt and over $90 trillion in unfunded liabilities) bankrupts itself in search of the holy climate grail, will the end result of global domination by powerful green house gas emitters produce a more sustainable world?
We do not advocate one political position over another or one extreme view over another (i.e. except that as our dear readers know, we do not deny that we are dedicated to the intent and protections of the Constitution of the Unites States and its precedent, Declaration of Independence). And we do not seek compromise for the sake of 'getting along'. Instead, we search for reason, a place between excess of bureaucracy and deficiency of precaution -- which which Aristotle might still today characterize as the "Golden Mean". -dh)
Ferrara's words, continued: "...future generations of scientists will look back and say this is the moment when we took the political out of the political science of "climate change," and this is how we did it. Real scientists know that these 50 co-authors are real scientists. That is transparent from the tenor of the report itself.
"The publication is "double peer reviewed," in that it discusses thousands of peer reviewed articles published in scientific journals, and is itself peer reviewed. That is in sharp contrast to President Obama's own EPA, which issued its "endangerment finding" legally authorizing regulation of carbon dioxide (CO2) emissions, without submitting the finding to its own peer review board, as required by federal law. What were they so afraid of if 97% of scientists supposedly agree with them?
"The conclusion of the report is that the U.N.'s IPCC has exaggerated the amount of global warming likely to occur due to mankind's emissions of CO2, and the warming that human civilization will cause as a result "is likely to be modest and cause no net harm to the global environment or to human well-being." The primary, dominant cause of global climate change is natural causes, not human effects, the report concludes."
Clearly, Russia has leverage over Ukraine. Depriving Ukraine of energy supplies or reasonably priced energy could deal a devastating economic blow to the struggling country.
The map also illustrates the importance of the United States and Canada reasonably developing their own energy resources. Energy is the building block of an economy and all economic activity in modern societies is totally dependent on both the supply and the reasonable pricing of energy supplies--as we learned with the Arab Oil Embargo in the 1970s.
With continuing delay of the Keystone XL pipeline and continuous stalling of other energy and mining projects, America's leaders are preventing their citizens not only from having massive new employment, but from enjoying the energy independence and national security which they deserve and could so easily enjoy but for an obstinate Administration.
The map was created from data provided from National Gas Union of Ukraine by RIA Novosti. We display the map with appreciation, subject to permission requested from the owner. This and other similar maps are available to public viewing on Google. -dh
Early Thursday News:
|This morning, we board our favorite airline, Alaska (NGP Photo, "Rockey Mountain High"), heading to Miami then on a wonderful partner airline (American) bound for writing and photography in Ecuador for a few weeks. Never fear, dear reader: every day we keep close in touch with goings on in the energy scene through our friends and associates from Inuvik to Calgary, Toronto, Washington, Houston, Williston, Juneau, Anchorage, Faribanks and Barrow...and beyond. You are our priority, and we'll keep you informed! -dh|
Juneau Empire by Matt Woolbright. Leaders from the private partners in the proposed Alaska LNG project urged lawmakers Tuesday to support the plan that they call a good business venture for everyone involved. ...
All those testifying pointed to the recently adopted Heads of Agreement document as an indicator that now is the time to press forward.
That document is “enabling unprecedented commercial alignment which is possible with the state’s participation” in the project, BP Exploration Alaska’s David Van Tuyl said.
Following up on Wednesday's report of the OCS Governors Coalition, here are other links:
The Washington Post
The Washington Post
Energy & Environment News
The News & Observer