Sponsored Content: Wave Of New LNG Production, Fall In Prices, Pressures New LNG Projects

The recent wave of new LNG projects coming to market has caused supply to significantly overshoot demand, and low prices, triggered by the fall in benchmark oil pricing, puts the future of new projects under considerable uncertainty.

The dramatic spreads between Asian gas markets and North America starting in 2011 unlocked 160m tons of new LNG projects into a market of only 325m tons, according to Geoffrey Cann, partner oil & gas with Deloitte Canada.

This capital is now coming into production. Starting in 2015 and continuing through 2017, one new 4m ton LNG train comes onstream every 40 business days. This equates to an incremental 1,200 cargoes of 150,000 cubic metres to be placed in market during this time line. Much of this is on contract, but many cargoes are heading into portfolios without clear destination.

Cann is speaking about natural gas and LNG developments at an upcoming Canadian Energy Research Institute (CERI) Oil & Gas Symposium. The conference is taking place March 6-7 at the Calgary Telus Convention Centre.

More supply will follow

More supply will follow as the five U.S. projects proceed through commissioning, and the remaining Australian projects (Inpex, Prelude, Wheatstone and Gorgon) finish in 2017 and 2018. Dozens of projects are slowly progressing through approvals, awaiting a market signal to proceed.

Meanwhile, the demand outlook is slowly shifting. Deloitte estimates LNG demand will grow 4.5 per cent CAGR from 2015 to 2035. The number of LNG buyers is growing. Countries with import facilities have doubled in the past 10 years, and will likely double again, helped along by new low-cost, small-scale floating storage and regasification units.

And new buyers will be different again from the legacy buyers of the past. The next group of buyers is likely to be the smaller, second-tier cities in China and India, more island economies and ports. There will be many more individual buyers who may purchase more frequently and in smaller volumes.

Buyers will naturally want to diversify their supply instead of being tied to single supply sources. Therefore, buyers will source from multiple producer countries to minimize supply risk and to create options for supply management and optimization. Buyers will also have the ability to take in cargos, and reload them back into the market as conditions warrant.

Gas usage

Gas uses will change, increasing demand. More gas will feature in transportation applications to displace diesel in rail and trucking, and bunker fuel for ocean shipping, he said. In many cases, gas buyers will have options on what fuel to use in which application, which will be based on the cost of fuel alternatives.

As with most energy shifts, it will take a long time for this demand to unfold, Cann noted.

Meanwhile, commodity pricing weighs heavily now in the decision to sanction new projects, and the gap between breakeven pricing and current market pricing is too vast for most projects to achieve FID.

Deloitte recently completed a detailed benchmarking exercise of 45 global LNG projects.

“Our analysis shows that 23 of these projects require a lifetime break-even price of $9/mmBtu DES Tokyo. The nine most recently completed LNG projects in Australia require a break-even price of at least $12 and as high as $16 over a sustained 20 year period.”

Contract pricing for LNG in Tokyo in December averaged about $7.50/mmBtu, and spot prices were somewhat higher because of improved demand in the winter heating months, at $8/mmBtu.

With today’s low commodity prices, it is difficult to envisage a scenario where LNG prices will double to the required break-even price, which would require benchmark oil prices to rise to $100/bbl, Cann said.

“Our analysis also shows that to be approved, Australia’s next generation LNG projects must improve on the existing Australian project economics by accelerating project delivery by 30 per cent, reducing ongoing capital cost by 47 per cent, and ongoing operating expense by 75 per cent.”

Canada’s greenfield LNG projects are similar in design and scope to the Australian projects — high quality gas reserves, long pipelines, large tidal greenfield LNG plants, remote and costly construction sites. Similar cost targets therefore apply, which helps explain the slow and cautions pace of approvals.

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