The first fifty years of LNG has seen a remarkable evolution as the LNG trade evolves to meet the varying demands of buyers around the globe. In the first part of this article, we looked at the top changes in LNG over the last twenty years.  In this final part we will look at current “realities” facing industry as a result of those changes and consider how the industry will evolve over the next twenty years.
Five “Realities” Flowing from the Past Twenty Years
- Until LNG becomes recognised as a commodity, the business of LNG will stay founded on long-term relationships that support a seller’s high development costs while providing buyers with supply security. Despite increases in spot trades and short-term contracts, the reality remains that funding LNG projects requires the security of executed long-term sales contracts prior to LNG development and production.
- The LNG market is cyclical and although still linked to world oil prices, it vacillates between a buyer’s and seller’s market as political decisions and world events influence the gas price. Concerns about security of supply have led countries like the UK to supplement pipeline gas supply through increased LNG imports in order to preempt events like the 2008 Russia – Ukraine gas dispute.
- Notwithstanding Qatar’s massive capacity and integrated supply chain, Asia and Australia will remain the “center” of LNG activity.
- Despite efforts to develop an LNG indexing system similar to that applied by OPEC, there is still no standardised “global” LNG price. Henry Hub (US), NBP (UK), and JCC (Asia) pricing are regularly integrated into complex pricing formulas in supply contracts for the regions they represent.
- LNG has clear safety advantages over gas operations; however, public opinion is occasionally manipulated to make unfair associations with unrelated hydrocarbon spills such as the Deepwater Horizon. The reality is that LNG is a safety success because there has never been a major LNG release from a ship nor has there ever been a terrorist incident.
Taking all these developments into account, what can the LNG trade look forward to in the next twenty years?
The LNG Trade over the Next Twenty Years
- Geopolitics will make LNG the preferred fuel as developed nations continue to seek cleaner sources of energy. Geopolitics will drive a greater desire for diversification of fuel sources and will encourage projects like the new Singapore LNG terminal, which is designed to eliminate Singapore’s reliance on pipeline gas from Indonesia and Malaysia.
- Increasingly, new LNG supplies will be derived from unconventional gas sources such as shale gas and coal bed methane. Countries with existing production and liquefaction facilities near unconventional resources will have an advantage over greenfield projects. Indonesia is well-placed to capitalise on this trend with reportedly 450 tcf of coal bed methane reserves and available capacity at its liquefaction facilities. A rise in shale gas production in the US has already prompted conversions of existing US Gulf of Mexico import terminals into export terminals.
- As evidenced by the recent final investment decision (FID) by Shell in Prelude in Australia, floating liquefaction technology will actually be implemented and not just planned. This use of floating technology will be especially prominent in areas where offshore stranded gas deposits are too expensive to develop onshore (e.g., with expensive trunklines).
- The LNG trade will see even more complexity in contracting as changes in technology require changes in deal structures, such as allowances for multiple destination shipping and flexibility in LNG sales contracts.
- Widespread acceptance of multi-user LNG export-import facilities will lead to an increase in trading. Governments will require infrastructure sharing in projects because of potential environmental impacts and a desire to discourage an unnecessary proliferation of infrastructure.
The fifty year history of the LNG trade provides a useful span of time for reflection. LNG’s growth since 1990 has exceeded all expectations. If, as predicted, gas and therefore LNG becomes the preferred fuel throughout the world, then exponential industry growth will result. The gas industry may then be forced to concede that its offspring has distinguished itself from its parent industry and that LNG has indeed become a separate and distinct commodity.