Please provide an overview of the North American social/cultural/economic/political climate and its impact on LNG activities as well as any new developments or trends for 2013 that will impact the North American LNG market.

KK: North America has seen nothing short of a revolution in natural gas production over the last several years. While in 2005 the US Energy Information Administration (EIA) projected US LNG imports would hit 12 Bcf/day by 2030, seven years and a shale gas revolution later the same EIA projected that by 2030 exports could be as high as 12 Bcf/day. To see a swing of 24 Bcf/day in official projections over the course of seven years is nothing short of remarkable. In Canada, the story is a bit different. The shale gas revolution in Canada has to an extent exacerbated a problem created by the shale gas revolution in the US. Canada has for decades been an exporter of natural gas to the US (unknown to many, Canada is America’s largest foreign supplier). With US natural gas production at an all-time high, however, the demand for conventional Canadian gas is now a function largely of long-term contracts. When those contracts expire, Canadian producers know they must have alternate export routes for their gas, conventional and shale. The result is a dash to liquefaction in both countries -- with the US wanting to monetize cheaply produced shale gas and Canada wanting to secure new markets to replace the disappearing market to the south.   

Please provide a summary of recent significant shipping/midstream activities in North America.

KK: There are two big stories in the LNG shipping space that impact North America. The first is the tremendous potential for liquefaction projects coming online. When those projects are commissioned, they will require ships. Either those ships will be procured by LNG buyers under FOB sale and purchase agreements (SPAs) or by the project sponsors selling into ex ship SPAs. Either way, I believe there will be a tremendous demand for newbuild LNG carriers over the next several years, along with all the activities that attend large-scale ship procurement programs, from time charters to shipbuilding contracts to shipping finance. The second story is the expansion of the Panama Canal and the ability, following its completion, of conventional LNG carriers to transit the Canal. The impact of this change is significant and will have a dramatic effect in the United States. While Canada is already geographically well-positioned to export LNG to Asia, and while a couple of US West Coast projects are similarly fortunate, a US Gulf Coast project can, on a Tokyo-bound delivery, save as much as 15 days each way going through the Panama Canal (as opposed to crossing the Atlantic and transiting the Suez Canal or going around the Cape of Good Hope). With today’s charter rates exceeding $100,000/day, that’s a round-trip savings (before paying Canal dues and not including fuel savings) of $3MM per delivery (or approximately $1/MMBtu). Some might call that a game changer.

What is the current prospect for more U.S. export projects by 2020?

KK: At the moment, we only have one project approved for non-FTA exports, so I would say the prospect for more is very good indeed. The US Department of Energy (DOE) issued its first non-FTA export permit to Cheniere almost two years ago. The DOE is currently considering at least 19 other export permits. Unlike Canada’s National Energy Board (NEB), which has overseen for decades an energy sector operating on a strong export footing and which has already issued three export permits for projects in British Columbia, the DOE has overseen an energy sector in the US which has, for largely the same amount of time, stood solidly on an import footing. Change is difficult. The US is now grappling, I believe, not with whether to export more gas but with how much more gas to export. Of the 19 applications presently in the DOE’s queue for non-FTA export approval, while I believe all economically viable projects should be approved, I question whether all of them will be approved. That said, the DOE may not be able to overcome the statutory presumption that each application must be approved unless the DOE proves on the record that approval would be contrary to the public interest. And therein lies the dilemma. While the arguments from the gas producers’ side are obvious, there are no shortages when it comes to competing interests. Environmentalists oppose exports because exports mean construction along coastlines. Some industry groups oppose exports because they believe their feedstock costs will rise. Fear not, however. Somehow the DOE will manage to leave at least 60% of us disappointed and the other 50% of us elated but wondering where they went wrong with their math.

What do you think the LNG shipping industry will look like 10 years from now?

KK: Ten years ago it was virtually unheard of to order an LNG carrier on a speculative basis. Vessels were chartered under long-term time charters for use on a designated route between liquefaction and regasification terminals for 20 to 25 years and only on the basis of a signed charter was a shipbuilding contract executed and a first installment paid. Ten years later the size of the fleet has more than doubled, the maximum size of LNG carriers has almost doubled, and there are dozens of vessels being built on a speculative basis. Today, China is emerging as a player in the shipbuilding industry and I would be foolish to speculate as to where the Chinese yards will be in ten years’ time but the same question was once raised when the South Korean shipyards had the temerity to challenge the Japanese yards for dominance. What I can say with some degree of certainty is that there will be a fleet significantly bigger than the fleet that exists today. And as LNG project developers continue to move toward larger volumes in destination-flexible LNG portfolios, there will be a larger number of ships unwed to a particular trade, leading to more flexibility in the shipping market and more vessel availability for voyage charters and short-term time charters.

Please provide any additional information pertinent to LNG in your region.

KK: The use of LNG as a transportation fuel is also going to have a significant impact on North America over the next decade. Shell has been a significant player in the development of LNG transportation fuel infrastructure for long-haul trucking in the US, with a series of LNG fueling facilities at Flying J truck stops along major interstate trucking routes nationwide. Westport Power, Cummins, Caterpillar and Volvo are also significant players in the long-haul LNG-fueled trucking space. In rail, Canadian National recently retrofitted two Electro-Motive Diesel engines to run on natural gas and conducted mainline testing of the fuel as a replacement for diesel. In shipping, there will in the near future be a significant number of LNG carriers that burn LNG -- not boil-off gas but LNG -- through direct injection in engines like the MEGI engine being deployed by Qatargas and RasGas across their fleet of LNG carriers. The MEGI engines, developed by Man Diesel & Turbo, are designed to be deployed on LPG, Ro-Ro and container ships as well. Each of these applications not only offers material reductions in CO2, NO and sulfur emissions, but the increased demand for LNG on a macro level that will result from widespread deployment of LNG as a transportation fuel could be, like shale gas, revolutionary.