BP and Shell ready for new LNG landscape

Senior executives from BP and Shell are optimistic about the future of global gas and LNG demand, as well as the industry’s ability to manage the new wave of demand growth.

Speaking at the CWC World LNG Summit in Barcelona on Tuesday, Jonty Shepard, chief operating officer of BP’s LNG division, said that while supply would not be an issue for the foreseeable future, growing demand presents certain challenges. "It’s a healthy market and demand is growing – but the sources of that demand are changing," said Shepard.

He said LNG suppliers needed to accommodate several new buyers who were seeking shorter, more flexible terms. "We don’t want to end up in the 2012 situation where there wasn’t enough supply, so we [the industry] destroyed demand."

Shepard forecast LNG demand would grow in countries where energy policy was driving coal displacement, such as China and the UK, as well as in territories with dwindling nuclear power capacity, such as Japan, Taiwan and Europe.

Steve Hill, Shell’s executive vice president for gas and energy marketing, was also optimistic about future demand. "Gas will continue to supply the chemicals industry […] and it will be a long time before anything but gas heats Moscow, Seoul and Beijing in winter," he said.

Asia’s future

Asia will continue to play a significant role despite a blip in 2015, said Hill. He pointed out that the continent had a 20% share of the current LNG market but was set to account for 40% of future growth.

Geoffroy Hureau, secretary general of Paris-based data provider Cedigaz, called the slowdown in Asian LNG demand in 2015 "disturbing", because the continent had been expected to drive future demand for the fuel.

However, Hureau was optimistic that global LNG demand would continue to grow – citing Egypt, Jordan and Pakistan as significant new sources of demand. All three countries began LNG imports in 2015.

Demand from China, India and France also grew in the first 11 months of 2016, Hureau noted.

Hill was confident the industry would manage the new wave of LNG demand growth. "These are markets where LNG gas infrastructure can replace production, so they are easiest. Once the LNG terminal is in place, you are ready to go," he said, citing the examples of Egypt and Pakistan.

Shepard said the depletion of indigenous gas reserves and growing demand was the "perfect recipe" for LNG demand growth.

Developing demand

But Laurent Vivier, president of gas at Total, told delegates it was up to suppliers to help develop these new markets, which require considerable investment.

"You need the players in the LNG upstream to start considering investment in the downstream supply chain, including import infrastructure. Total has invested a huge amount in the upstream and now we need to do our share, and other players need to do the same, to develop downstream demand," he told delegates in the morning session.

Vivier cited the example of Total’s investment in an LNG import project in Ivory Coast that could provide 3 mtpa of new demand by 2020. The cost of supporting such import projects is relatively small compared with supply-side spending, he said. He compared Total’s investment of approximately $200 million in the Ivory Coast project with the billions of dollars invested in liquefaction capacity worldwide.

Eric Bensaude, managing director of commercial operations and asset optimisation at Cheniere Marketing, also expects LNG suppliers to become more involved in supporting downstream projects.

"We have put development money in a project to build an FSRU, jetty and power plant in Chile," he told delegates.

Suppliers need to take on new roles to unlock new sources of demand, agreed Bensaude. "As a supplier we are willing to go downstream and deliver ex-ship to potential buyers who need smaller parcels and help them deliver their power projects," he told delegates.

First-time LNG buyers such as South Africa and Morocco need support from suppliers for their projects to be brought online, said Bensaude.

Using FSRUs can reduce the timeframe for opening new markets to LNG, as they can be built and deployed in around 18 months. More than 30 LNG import projects worldwide are considering using FSRUs but there are only around 11 firm orders for vessels, seven of which are already spoken for. Although some shipowners have ordered FSRUs without being certain where they will be deployed, they typically wait for project developers to take an FID before placing an order.

Shipowners are increasingly looking at converting old LNG carriers to cut down on construction times and meet the needs of project developers. Höegh ordered equipment in August to convert one of its LNG carriers into an FSRU. The move is expected to cut the conversion time from 18 months to 12; the company hopes to complete its first conversion by the end of 2017.

The ability for gas to enter new sectors beyond traditional power creates a huge opportunity for demand growth – and not just in the established markets of India and China. It could see LNG delivered by truck inland to industries lacking access to pipeline gas, Vivier said.

Supply-side flexibility

The executives from BP and Shell argued that large LNG suppliers were already meeting the challenge of beefing up the demand-side landscape and providing extra flexibility for customers.

"Take small-scale LNG – a concept that has been talked about forever – we’ve done it," said Hill, citing an agreement signed in August for the construction of a small regasification terminal in the British Overseas Territory of Gibraltar, which is to the south of Spain.

The terminal will supply fuel to a nearby gas-to-power plant that is under construction. The facility will be operated by Shell subsidiary Gasnor. "The LNG will be supplied by small ships, based on genuine commercial principles," said Hill.

Shepard highlighted BP’s construction of an 800 MW gas-to-power plant and LNG terminal in the northern Spanish city of Bilbao in 2003 and the supermajor’s interest in China’s LNG terminal in Guangdong province. "The will to do it is there," he said. "We just need to collaborate to understand what each individual customer needs."

Despite the consensus that big LNG suppliers needed to be more flexible to accommodate existing and prospective customers, the two supermajor executives said there were limits.

"[Increased] collaboration doesn’t just mean sellers will take every risk – it needs to be considered on deal-specific basis," Shepard said in response to a delegate who asked if large LNG suppliers would accommodate customers who were more interested in a per megawatt hour price, rather than per MMBtu.

Supply outlook

While speakers were confident the supply side would remain comfortable for the remainder of the decade, the picture looks less certain after that point.

Vivier said the lack of investment in new sources of supply was a major concern, given the lack of new FIDs taken on export projects this year.

Khalid Sultan R. al-Kuwari, chief marketing and shipping officer at Rasgas, expects the market for LNG to remain long over the next five years, but suggested he too was concerned by the longer-term outlook.

"We see [in] the next five years there being excess supply in the market; the question is what happens in the 2022-2025 timeframe if no FIDs are taken in the next couple of years," he said.

A lot of investment in new LNG supply has been made over the past 10 years with the support of Japanese utilities and trading houses looking to capitalise on the large arbitrage between US Henry Hub prices and high LNG prices following the Fukushima disaster.

Under a low-price environment and with declining demand in many of the more mature markets, the executives said new ways of financing projects must be found.

"You need long-term contracts to underpin the financing, but buyers are asking for shorter contracts and more flexibility. It is tough to ask the aggregators to make the investment on new export capacity, and I think the industry has yet to find a solution for getting together the financing new export projects," Vivier told delegates.

The Paris-based International Energy Agency (IEA) said in November that it expects a 30% increase in LNG export capacity over the coming decades.

The growth of LNG demand in emerging markets is predicated on gas showing itself to bed to be "secure, affordable and with price volatility kept within reasonable limits", the IEA said in its latest World Energy Outlook.

This will require more investment in LNG capacity over the coming years as "the current overcapacity of LNG production will be absorbed by the mid-2020s". Without investment there could be a supply crunch and higher prices, according to the IEA’s WEO division head Tim Gould.