Perhaps some sobering reality for the LNG cornucopinans out here. The entire story at
http://www.downstreamtoday.com/news/art ... a_id=43641Reuters - The gap between perception and myth in LNG is widening, with both buyers and suppliers appearing to subscribe to views that bear limited resemblance to reality.This dynamic was very much in evidence at this week's Australian Gas Export Outlook (AGEO) conference in Brisbane, where buyers appeared confident that a wave of new projects around the world would leave them spoilt for choice of supply, and at lower prices. Producers labour under the impression that Asian demand, led by China, is a bottomless pit that will suck up all the LNG they can make, while still earning high, oil-linked prices. The outlook for LNG is confused and the industry isn't being well served by the lack of clarity.
It's time to try and debunk some of the myths.
Myth 1: A Wave of LNG is Coming From Global Projects: At the AGEO meeting this week, senior representatives from a major Japanese LNG buyer and an Indian buyer spoke of the increased supply expected from the United States, Canada and East Africa. They spoke as if the projects that have been proposed are all likely to become reality, and within the timeframes mooted. This is extremely unlikely, and what appears to have happened is that project developers have proposed so many new plants that buyers seem convinced they are about to be swamped with offers. The reality is likely to be far more sobering. New projects, and a handful of others now being built, are likely to lead to a small market surplus of LNG around 2018.
But buyers' expectations of a sustained surplus are built on huge new supplies coming on stream in the United States, Canada and the East African nations of Mozambique and Tanzania. Most of these proposed projects don't have committed buyers, or gas supply. Rather many are so-called tolling projects that merely charge for the liquefaction process, with the sourcing of feedstock gas and shipping being buyers' responsibility. This leaves them highly exposed to U.S. Henry Hub gas prices, which are now about $4.58 per million British thermal unit. However, many analysts believe the trend is higher over the coming years, and U.S. gas prices also suffer from seasonal or weather-event-related spikes.
Myth 2: U.S. LNG Will Force LNG Prices in Asia Lower: This myth is based around the wide gap between U.S. natural gas prices and long-term, oil-linked contract prices in Asia, with Japanese buyers typically paying an average of around $15 to $16 per mmBtu, almost four times the Henry Hub price. Since U.S. LNG projects can source gas at U.S. prices, the theory goes that adding in liquefaction and transport costs of around $7 per mmBtu, takes the cost of LNG delivered to Japan from the U.S. Gulf Coast closer to $11 per mmBtu. There are several problems with this, the most obvious being that U.S. producers will sell at a steep discount to Australian and Middle East suppliers. Rather, it's more likely they will sell at a cost just fractionally cheaper than rivals, so allowing them to maximise profits while ensuring market share. This myth also works on the assumption that U.S. gas prices will remain low for decades. However, the risk must be for them to rise as increasing demand from electric utilities, industrial users, transport and residential customers starts to soak up even the huge amounts of available shale gas. Sharply lower prices are not as likely as buyers hope, and even if they were delivered, it would only be for a very short period as new LNG capacity would simply not be built and existing capacity would idle, or run at reduced rates.
Myth 3: China Will Buy Whatever Can be Produced: China has a pollution problem and needs cleaner energy. That's not a myth, but the belief that the Chinese will be prepared to use ever-increasing amounts of expensive LNG is probably about as hopeful as the iron ore miners who saw demand rising for decades to come. Yes, China is building re-gasification terminals at a rapid rate, with 50.2 million tonnes under construction or approved, more than doubling the existing 31.1 million tonnes. There are plans for a further 29.5 million, but even if all this capacity is added, it's by no means certain all will be used. Chinese demand is likely to reach some 60 million tonnes around 2020, but this can easily be met from new supply already being built. Additional demand will be added by new import facilities in Southeast Asian countries such as Singapore, Malaysia, Indonesia and Thailand, but again this is likely to be met.
Myths, if widely believed, distort markets and LNG appears to be in this category. Buyers awaiting cheaper LNG have to realise this is unlikely, unless investors with billions of dollars are prepared to back risky projects in the United States. Project proponents need to do a reality check on the likelihood of finding stable, committed buyers willing to pay prices high enough to justify massive initial investments. This isn't to say more projects won't be built, but only developments in the United States, Canada, East Africa and elsewhere that offer compelling economics will go ahead, and there won't be that many of them.