ADIPEC '17: Execs discuss the changing world of LNG

By Adrienne Blume, Editor, Gas Processing and Executive Editor, Hydrocarbon Processing

ABU DHABI—On the opening day of ADIPEC, executives from the LNG sector gathered for a heavy-hitting "C-Suite Dialogues" afternoon panel discussion to answer the question: "What is the future for natural gas and LNG in a low-carbon, low-cost landscape?"

Michael Stoppard, Chief Strategist for Global Gas at IHS Markit, moderated the panel, which included four executives representing Uniper, Engie, Tellurian and Cheniere.
Michael Stoppard, Chief Strategist for Global Gas at IHS Markit, moderated the panel, which included four executives representing Uniper, Engie, Tellurian and Cheniere.

LNG is changing global trade—and vice versa

Stoppard asked the panelists to comment on the spread of gas, and particularly LNG, as a global fuel of choice.

Keith Martin, Chief Commercial Officer for Uniper Global Commodities SE, noted, "The reason why LNG is a very important fuel in Europe is due to regulatory pressure. Many countries are moving coal-fired generation out," as well as nuclear power.

"The LNG that is coming in now is having a price impact on Europe," Martin noted. "But LNG is complementary to renewables. It will have a growing role. We'll see more CCGT [combined cycle gas turbine-driven power], and more forms of gas use to ensure stability ... [Gas] will open new markets that have never been opened before."

Andrew Walker, Vice President of Strategy and Communication for Cheniere Marketing, commented, "The world of LNG looks very different today than it did 5 yr ago, and even 2 yr ago. Our belief is that natural gas has an important role to play in the energy mix to combat carbon emissions. We believe it is a key component of a key deliverable; it is an enabling solution."

However, Walker also noted that gas must grow on its own merits as a sustainable, cost-effective and environmentally friendly fuel, with the help of the industry. "Gas has to compete as a fuel, and it has to compete for its place in the energy mix," Walker said.

"We can't only say gas is an affordable and reliable fuel; gas must prove itself to its customers. That's where I think we in the gas industry have slightly fallen down in the past decade; we haven't really proven that."

"Despite being a global industry, we are still a very regional industry," Walker continued. "No one size, no one model fits all. However, an LNG transition is underway. The globalization and the commoditization of gas will prove that gas can be reliable, commodifiable and secure."

This gas supply, Walker said, will be "...more resilient and more competitive, which is good for gas customers—and what is good for gas customers is good for gas as a fuel."

Drivers for pickup in gas use

Stoppard then asked the panelists: "What's driving gas use? Is it economics, technology or politics?"

Keith Martin noted that proposed regulations are leading to a decline in coal use. "In this case, gas will be driven by regulations," he said. "Very few, if any, new coal plants will be built in Europe.

Martin also said that the industry needs guidance in terms of policy, fuel mix and economic challenge. "If gas is too expensive versus alternatives, it's hard to justify gas against other fuels," he noted.

Martin Houston, Vice Chairman of Tellurian, noted, "Even if gas grows at enormous rates, it's still a very small part of the fuel mix in some parts of the world, so we need to keep that in mind." He gave the example of India, where the government has repeatedly confirmed its commitment to natural gas, although coal is cheap and plentiful and helps lessen poverty.

Engie Global LNG CEO Philip Olivier pointed to environmental concerns, particularly climate change as a long-term problem, as well as the need to reduce pollution to improve air quality, as motivating factors for greater gas use. He cited the example of the UK, where in 2013, 37% of power generation came from coal and 27% came from gas. Today, coal provides only 10% of power generation, while gas provides 43%.

Houston added that growth in the transport sector will encourage the use of gas. "The 2020 IMO [fuel sulfur regulation] change will have a profound effect on the marine industry," he said. "But so little has been done in the marine industry; there's been a dearth of investment. I think it [the sulfur regulation] will come as a shock. I think ships will first move to low-sulfur fuel, and then move over to LNG."

LNG market dynamics: What do buyers want?

Stoppard then asked, "What are LNG customers looking for?"

Houston answered, "They're looking for shorter tenure, more seasonality, flexibility, low cost and a dampening of the long-term expected price."

He also noted that buyers are seeking choices for the index or basis around which they buy LNG. "That choice is here, and it's opened Pandora's Box," Houston said. "Now that buyers have choices of indices, they don't know what to do."

Walker, whose company, Cheniere, has sold 25 LNG cargoes on the international market to date, agreed with Houston. "Buyers don't know what they want … They now have more choices than ever, more power than ever. This is a new situation for them. It's the fastest change in the LNG industry that we've ever seen."

Buyers also need more tools from suppliers, Walker said. "They need tools for how to manage the markets. Some buyers are quite sophisticated, and others have more fundamental requirements, such as low price."

Olivier noted, "Buyers want mix of indexation, access to seasonality and access to short-term energy." However, these things will not protect buyers from the LNG supply shortage that is likely to be seen in the early 2020s, Olivier said. "We need a mix between long-term, medium-term and short-term supply, and there's too much focus on short-term now," the CEO asserted.

Houston added, "There's another type of customer—one looking for a holistic 'helping hand' from sellers. There's a need to provide these buyers with technical assistance and risk-management assistance, as well."

Timeline for gas as a commodity

Stoppard then asked, "How is the industry changing and moving toward commoditization? Is it helping get new projects off ground?"

Houston answered, "If you look at 2020, we'll have 1 Tcf of gas on the water, and we'll be loading 18 to 20 carriers a day. The market becomes short almost by its own efforts, rather than by its own design."   

Houston also explained that, to produce and finance LNG on this new, uncontracted spot market is a major challenge for the LNG market today.

"How do we build projects with nothing more than a few 5-yr contracts?" Houston hypothesized. "Here's how: number one, you have to cut out costs on the LNG chain. Number two, you have to integrate the upstream and the midstream. And number three, you have to reduce the manufacturing cost of LNG to the lowest possible level."

Walker commented, "Gas has been evolving toward commoditization for some time, but it's moving much faster now. It's still not quite there yet. The ability to finance off the back of the commodity market, raise investment and create new supply will be when we are truly commoditized … I think we will see that starting to form at the end of the decade—2019 or 2020."

"But it will be at least 5 yr before merchant-financeable capacity will happen," Walker added, "so we're about a decade away from being able to finance new projects on the spot market [for gas as a] commodity."

Martin noted, "In Europe, we've been talking about LNG liberalization for a while. Over the next year, a lot of new supplies will be released on the market and more people will be willing to buy spot cargoes, which will change the rules. It will be a game-changer."

At the close of the panel, Walker added, "Many different gas markets are still very regional. We have regional gas markets in a global trade system … But liquidity itself is not a panacea. You can have a liquid market without low prices, but we need liquidity and we need continued supply growth. Those are the biggest challenges as we grow and evolve into new business models."

ADIPEC is taking place at the Abu Dhabi National Exhibition Center from November 13–16.

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