Please provide an overview of the World LNG Climate and New Developments and Trends for 2013.
SRM: Albert Einstein once said that the reason for time is so that everything doesn't happen all at once. Yet that is almost what seems to be happening in the LNG industry.
The many exciting and divergent changes in the energy industry create a pace of evolution that requires thinking two steps ahead. The advent of shale and other unconventional natural gas and oil supplies in North America presents, even if there were no other changes underway, a once in a generation sea-change. Dr. Daniel Yergin recently described this development as "the most important energy innovation so far of the 21st century." The ripple effects of this development are too numerous to list here completely, but their hallmarks are seen in lower natural gas prices for North America, arbitrage opportunities for the rest of the world, changed geopolitical relationships involving the U.S., the Middle East, Russia, Japan and China, and dramatic investment plans for manufacturing and for LNG exports in countries with exploitable shale gas assets. The effects of shale gas are addressed in each of the regional Q&A contributions to this Special Report.
At the same time, natural gas is playing a critical role in helping countries reduce their carbon emissions from energy. The United States reduced its CO2 production in 2012 despite a growing economy, largely as a result of switching some electric power generation from coal to natural gas. Jason Bennett, in his Q&A, discusses the counter effect in Europe as cheap coal battles with a policy to reduce carbon emissions. On both sides of the Atlantic, as well as in Asia, public policies supporting carbon reductions are running into budget constraints, with the result that natural gas has the potential to an inexpensive solution that can firm-up capricious solar and wind energy production and reduce greenhouse emissions.
Increases in construction costs, the expense of waterfront property, long construction times, and environmental regulations for shoreside facilities have combined to lead LNG project sponsors to turn to floating LNG regasification and storage vessels. Such floating units have quickly become the norm, rather than the exception, as described in the Q&As of John White (Latin America) and Russell Wilkinson (Asia). The switch of part of the industry to floating terminals, and particularly now with the advent of floating liquefaction vessels, has opened the industry to a broader set of potential contractors with more competition.
New natural gas finds around the world likewise have the potential to reconfigure the LNG marketplace. Tom Moore (Africa), John White (Latin America) and Jason Bennett (Europe) describe the exciting opportunities for East Africa, Colombia and the East Mediterranean, respectively. On the flip side, Sean Korney (Middle East) describes how OPEC producers are seeking to develop import facilities to bring in LNG from North America and elsewhere -- literally bringing coals to Newcastle.
What Region is currently having the most significant impact on the global LNG market?
SRM: It is difficult to overlook the impact that the North American "shale gale" is having on the global LNG market. As discussed in the Oil & Gas Journal article provided with this Special Report, "U.S. Debate on LNG Exports Centered at Energy Department" and in Kevin Keenan's Q&A (North America), the production of shale and other unconventional gas is leading to a future reversal in the direction of gas flows and narrowing of regional price differentials. Three years before the first LNG cargo will leave the "lower 48" of the United States, spot prices in Asia are already trending lower, Asian buyers are seeking bids for HH-based prices for at least a portion of their purchases, and the government of Japan has announced interest in creating a natural gas - based price index.
How has the global LNG market changed in the past 5 years?
SRM: The world has almost double the number of LNG importing countries that it did five years ago. Many of these new entrants are not traditional, creditworthy customers, and are buying short-term, in non-ratable deliveries, for markets that are just building out their gas infrastructure. From a long-haul, point-to-point trade between supermajors and wealthy utilities, the LNG market has developed a liquid, even vibrant, secondary market with destination flexibility, swaps, upflex/downflex rights, and other options that allow parties to optimize value and tailor contracts to the particular needs of each party. Together, these developments have opened the industry to a broad array of new players, including national oil companies, financial institutions, commodity brokers, mid-sized oil and gas companies, and industrial end-users, all of which have made the industry more complex and more exciting.
What do you think the LNG industry will look like 10 years from now?
SRM: As Orson Welles said, if you want a happy ending, it depends on where you stop the story. For the next several years, demand for natural gas will likely be bolstered by a (hopefully) improving world economy and continued pressure to reduce carbon emissions through the retirement of older coal-fired power plants. The differential between North American natural gas prices and world LNG prices (particularly JCC-linked prices) will narrow, but not likely disappear, continuing to produce interesting arbitrage opportunities for those able to find efficient means of exporting methane from North America (whether as LNG, GTL, petrochemicals, fertilizer or otherwise). However, if (and this is a very large if) countries around the world develop meaningful production of shale and other unconventional gas, then supply could potentially overtake demand. Such a market could have a dramatic impact on price, and would likely lead to a challenge to the financeability of new large LNG liquefactions. Ironically, we could see the world revert to a series of regional markets with smaller projects and prices that reflected local demand and supply conditions.
Is there any additional information pertinent to the global LNG market you want to share?
SRM: It is a great time to be in the LNG industry, with exciting opportunities as well as serious challenges. The LNG Team at Baker Botts is committed to this industry, and enthusiastic about being part of it. Please feel free to contact us if you have any questions or would like to discuss this Special Report.