OPINION Jun 25 2015 at 3:45 PM Updated Jun 25 2015 at 5:56 PM
Asian LNG sales contracts under pressure as prices diverge
The sun might be setting on old-style, cast-iron LNG sales contracts. Glenn Hunt
by Angela Macdonald-Smith
That people can even speculate that a long-term LNG sales contract might be broken says something about the tension prevailing in the Asian market.
The multi-decade contracts that form the backbone of Asian LNG trade have always had an almost sacred quality, relied upon as cast-iron by developers of multibillion-dollar supply projects and their lenders. Reputations, as buyers and sellers, are too precious to compromise.
But something is afoot. While there's no evidence that any contract will be reneged upon, talk has emerged in recent weeks of efforts afoot to have terms modified in ways that would have been unthinkable in the past.
At the root of the problem is the wide gap that has opened between spot and contract prices for LNG in Asia, which combines with other factors to suggest we are entering new territory. Spot prices that were trading up to a third higher than contract prices in early 2014 are well below now and are expected by many to remain so for the rest of the decade.
The increased depth in the market has contributed, with more buyers, more sellers and more traders, each with their own drivers and some under intense economic pressure.
Energy forecaster Fereidun Fesharaki, who has close links with many large Asian buyers, says that while producer-buyer relationships are still important, pressure is mounting on all sides to renegotiate contracts.
In the spotlight this week has been Origin Energy's $24.7 billion Australia Pacific LNG venture nearing completion in Queensland, and whether big customer Sinopec is seeking to modify contract terms to perhaps slow down its commercial purchases or to re-sell LNG elsewhere.
FALLING DEMAND
China's LNG demand has been falling dramatically short of some forecasts, as economic growth slows and high domestic prices discourage demand. Wood Mackenzie estimates China has contracted 18 billion cubic metres more than its LNG needs in 2015-17.
China has form in wreaking change in commodity markets: its favouring of cheaper iron ore from the spot market over contract supplies led to the end of the dominance of annual contracts in that sector.
But Origin boss Grant King dismissed this week any concerns over Sinopec's commitments to take its full 7.6 million tonnes a year volume from APLNG, saying he had "no reason to think" the Chinese customer wouldn't stick with the terms, which require it to pay for the gas even if it doesn't take delivery.
King emphasised the flexibility that is typically built into LNG purchase contracts early on to allow for the particular circumstances that a new buyer or seller might find itself in. That would include flexibility to re-sell gas outside of the home market, which he said was "perfectly normal", apparently even if that would depress prices further in an Asian spot market that APLNG itself might need to call on.
But it's not just Sinopec. Fesharaki also points to efforts by India's Petronet to renegotiate a big LNG contract and reportedly take less than its contracted purchase volume. PetroChina too.
On the buyer's side, the North West Shelf venture is known to be keen to re-negotiate the rock-bottom 25-year sale contract it signed with China's CNOOC in 2002 if any opening could be found. In the meantime, it is said to be using any means possible to limit deliveries under the deal.
Fesharaki believes the scene is getting set for change, particularly as surging LNG supplies from Australia and the US keep spot prices about $US3 ($3.88) per million British thermal units below contracts in low season, providing plenty of motivation for buyers.
"A key question is whether a Japanese, Korean, or Taiwanese buyer might more openly pursue a strategy of buying low‐priced spot cargoes while backing out of long‐term contracted volumes," he told clients this month.
"This may seem unlikely, but given the challenges many Japanese utilities face, it is not implausible."
Fesharaki suggests that could lead buyers and sellers to start seeking a pricing linkage that more accurately reflects short-term market conditions. Change is afoot indeed.
amacdonald-smith@fairfaxmedia.com.au
LNG firm Cheniere Energy plans expansion in the US
GEOFF HISCOCK THE AUSTRALIAN JULY 20, 2015 12:00AM
LNG firm plans US expansion
One of Australia’s biggest potential rivals in the global LNG trade, Houston-based Cheniere Energy, has given the green light for up to seven more gas processing trains on the US Gulf Coast that could lift its annual export capacity to 60 million tonnes by 2025.
Cheniere has already committed to five trains at its Sabine Pass liquefaction project in Louisiana and three at Corpus Christi in Texas. The proposed new trains would expand Corpus Christi and would add two new mid-size projects in Louisiana.
Cheniere is less than six months away from producing its first LNG for export from the 4.5mtpa Train 1 at Sabine Pass, which will mark the first US export of LNG outside Alaska. That gas will go to BG Group under a 20-year long-term supply agreement.
During 2016-17, Cheniere will add another 13.5mtpa of capacity as trains two, three and four come on stream at Sabine Pass. Two more trains are planned for the site, with train five now expected to begin operating in 2018 after the Cheniere board approved a favourable final investment decision for it on June 30, while train six is waiting in the wings.
According to Cheniere chairman and chief executive Charif Souki, all regulatory approvals are in place for train 6, and a final investment decision will be made once commercial contracts and financing are arranged.
Gas Natural Fenosa of Spain, Korea Gas, GAIL India, Total Gas & Power and British energy utility Centrica will take most of the output from trains two to five, with about 2mtpa left over for spot sales.
In a presentation this month, Cheniere says its break-even price range for its Gulf Coast LNG delivered ex-ship to Asia is between $US7.70 ($10.44) and $US8.40 per million metric British thermal units (MMBtu). In comparison, it estimates the break-even price for LNG from West Africa is $US9.50 to $US11.50, and $US14 to $US16 for northwest Australia.
The July spot price for LNG delivered to Asia is $US7.60, according to data from commodity information company Platts.
In its July 10 report, Oil & Gas Reality Check 2015, the Deloitte Centre for Energy Solutions said LNG was now very much a buyer’s market. It said high project development costs would, for example, “hamper Australian attempts to cost-effectively supply global consumers”.
It said this was “especially true in the current low-price environment”.
Qatar is the world’s cheapest gas producer and is currently the world’s biggest LNG seaborne exporter, with 77 million tonnes of annual capacity, ahead of Australia, Malaysia and Indonesia. Australia is expected to overtake Qatar by 2018 as new projects and expansions begin producing on the North West Shelf, the Northern Territory and in Queensland, where three coal seam gas-based LNG plants have been built on Gladstone’s Curtis Island.
BG Group’s Queensland Curtis LNG has already begun exports from its two trains, and the Santos Gladstone LNG and Origin-ConocoPhillips Australia Pacific LNG projects are expected to begin exports over the next few months.
If the three Gladstone LNG plants, the Darwin-based Ichthys development in 2017, and the Gorgon (late 2015), Wheatstone (2016) and Prelude (2017) projects on the North West Shelf all come to fruition on schedule, Australia will have about 85mtpa of export capacity in 2018.
All suppliers are targeting the Asian LNG market, where demand is expected to reach 270 million tonnes a year in 2020 and 314 million tonnes in 2025, according to the latest estimates from energy analyst Wood Mackenzie. The biggest customer for seaborne LNG is Japan, with annual imports of about 80 million tonnes, followed by South Korea and China. India is also growing in importance as a customer.
But price is an issue, with recent lower demand in China putting pressure on suppliers that include not just Qatar and Australia, but Papua New Guinea — where the ExxonMobil-Oil Search venture began shipments last year from its 6.6mtpa Port Moresby facility — and Russia, Africa and Southeast Asia.
Complicating the picture is the imminent arrival of new supply from North America, where a combination of pipeline networks, finance, skilled labour and technological advances mean companies like Cheniere, Louisiana-based rival Cameron LNG from 2017 and Texas-based Freeport LNG from 2018, can liquefy abundant and cheap shale gas and ship it to Asia competitively.
Cheniere, a relatively small producer with a market cap of about $US16 billion, claims in its presentation that it “can profitably sell LNG into key demand centres even in periods of lower market prices” and that “if LNG prices remain at lower levels, we would expect LNG demand to increase, thus signalling the need for more liquefaction projects.” In addition to its six-train 27mtpa Sabine Pass project, Cheniere has started work on the first two trains of its similar Corpus Christi project, where it hopes to begin exports in 2018. Its customers there are Pertamina of Indonesia, European utilities Endesa, Iberdrola, Gas Natural Fenosa, EDF and EDP, and Singapore-based Woodside Energy Trading.
In a statement last month announcing an expansion of Corpus Christi, Mr Souki said the site eventually would have 22.5mtpa of capacity from five trains. He said work on the final three trains could begin in 2017, with production in 2021.
In addition to Sabine Pass and Corpus Christi, Cheniere last month struck an in-principle partnership with Houston-based Parallax Enterprises covering four new trains of 2.5mtpa each, for a total of 10mtpa over two sites on the Gulf Coast. One is known as Live Oak LNG in southwestern Louisiana and the other is Louisiana LNG, on the Mississippi River 60km from New Orleans.
Mr Souki said the two extra trains at Corpus Christi and the proposed four-train partnership with Parallax would “bring our expected aggregate nominal LNG production capacity to about 60 mtpa by 2025”.
Mr Souki said Cheniere expected that the new liquefaction trains could be funded from internal cash flows.
Geoff Hiscock writes on international business and is the author of “Earth Wars: The Battle for Global Resources”, published by Wiley
Aug 6 2015 at 3:57 PM Updated Aug 6 2015 at 7:44 PM
Qatar's dirt-cheap LNG is making it the new energy superpower
The Al Rekayyat, a liquefied natural gas tanker, docked in Ras Laffan, Qatar, May 23, 2015. Operated by Royal Dutch Shell but owned by the emirate, the Rekayyat can carry around $30 to $40 million worth of liquefied natural gas. ANDREW TESTA
by Stanley Reed
The temperature hovered around 38 degrees on the jetty here, where a set of pipes were connected to a giant red-hulled ship. But the moisture in the air froze on the pipes and flaked off, creating snowlike flurries on the early summer evening.
The incongruous sight is common on the Qatari ship, the Al Rekayyat, which carries a frigid fuel known as liquefied natural gas.
Natural gas, when chilled to minus 162 degrees, turns into a liquid with a fraction of its former volume. The process has reshaped the natural gas business, allowing the fuel to be pumped onto ships and dispatched around the world.
After investing tens of billions of dollars, Qatar is at the forefront. Part of the emirate's fleet, the Al Rekayyat, run by Royal Dutch Shell, goes to Fujian in China and Yokkaichi in Japan, as well as Dubai and Milford Haven in Wales.
Natural gas cools into liquid form in one of the 14 'trains' which can stretch up to three-fifths of a mile, at Ras Laffan, Qatar.
Natural gas cools into liquid form in one of the 14 'trains' which can stretch up to three-fifths of a mile, at Ras Laffan, Qatar. ANDREW TESTA
When loading was finished recently, four tugboats pulled the ship from its berth with a deep roar. "I expect to be in the north channel around midnight," said the captain, Veerasekhar Rao Muttineni, over the marine radio, as the ship eased into the waters of the Persian Gulf. Four days later, it docked in Hazira on the west coast of India.
Once a poor nation whose economy depended on fishing and pearl diving, Qatar is a relatively new giant in the global energy trade.
In the 1970s, Shell discovered the world's largest trove of natural gas, called the North field, in Qatari waters. But there was no market for the fuel. Potential customers in Europe were too far to reach via pipeline, the usual method. Shell walked away.
Looking to the example of Malaysia and Indonesia, Qatar and Hamad bin Khalifa al-Thani, who was then its emir, started promoting LNG in the mid-1990s. Exxon Mobil was the important early investor; Shell, Total and ConocoPhillips soon followed.
Natural gas flares burn at the port of Ras Laffan, Qatar. Though Qatar is a relatively new giant in the global energy trade, an investment of tens of billions has put the emirate at the forefront of the processing, storage and shipment of liquefied natural gas.
Natural gas flares burn at the port of Ras Laffan, Qatar. Though Qatar is a relatively new giant in the global energy trade, an investment of tens of billions has put the emirate at the forefront of the processing, storage and shipment of liquefied natural gas. ANDREW TESTA
A THIRD OF THE WORLD'S LNG
Qatar and its energy partners took the business to a new level, developing far bigger and more efficient plants. Last year, Qatar produced about a third of all liquefied natural gas, although Australia and the United States have big export ambitions.
It is a lucrative business that has made Qatar the world's wealthiest country by output per capita. While industry growth has recently been flat, worldwide volumes have roughly quadrupled in the last two decades to about 240 million metric tons a year, accounting for about one-third of overall gas exports. Annual sales are worth an estimated $US180 billion.
"With the full development of Qatar, LNG came of age," said Michael Stoppard, chief gas strategist at IHS, a market research firm. "Qatar made LNG a bigger business – bigger projects, bigger ships, bigger volumes and a much bigger global footprint."
Workers at the huge liquefied natural gas terminal in Ras Laffan, Qatar.
Workers at the huge liquefied natural gas terminal in Ras Laffan, Qatar. ANDREW TESTA
Ras Laffan, a desert headland about an hour's drive from Qatar's capital, Doha, bristles with storage tanks, pipelines and other gas processing facilities. Gas comes in from offshore wells and then passes through a series of refrigeration units that clean the fuel and chill it to liquid form. Qatar Gas and RasGas, the emirate's two exporting companies, have 14 of these facilities, known as trains.
"We pushed the R&D to go another step, to increase the size," said Ibrahim Bawazir, a Qatar Gas executive, as he led a group of visitors dressed in orange fire-resistant suits around Qatargas 4, one of the largest and most modern installations. It stretches for three-fifths of a mile. "It is almost impossible to build LNG on this scale," Bawazir said.
FRACTION OF THE COST OF US, AUSTRALIA
With the ability to produce and process such huge quantities of gas, Qatar can keep its costs low. IHS estimates that it costs about $US2 per million British thermal units, a standard natural gas measure, to produce and liquefy gas in Qatar. That compares with $US8 to $US12 for planned projects in the United States, East Africa and Australia. The low cost structure allows Qatar to be more nimble and make money even in the current weak environment, when prices are low.
The Qataris originally planned to deliver much of their LNG to the United States and Europe, but those plans were frustrated by the shale gas boom in North America. Instead, three-quarters of Qatari gas flowed last year to Asian countries like China, India and South Korea. Japan was Qatar's largest customer as the country's electric utilities substituted natural gas generation for nuclear after the 2011 Fukushima disaster.
Qatar's shift toward Asia mirrors broader trading patterns in the oil industry. In recent years, gulf producers like Saudi Arabia, Iraq and Iran have increasingly focused on Asia, where demand for energy imports is growing. Qatar is well placed to serve Asian markets, particularly India, which is only a few days' sail across the Arabian Sea.
A vital part of Qatar's effort has been a new fleet of carriers, which are substantially larger and more efficient than previous models.
At over 300 metres, the Al Rekayyat, which was built in South Korea in 2009, is only slightly shorter than the largest aircraft carrier. The ship carries up to 217,000 cubic meters of gas, about 7.7 million cubic feet, worth around $US30 million to $US40 million at today's market prices.
TOO FAST FOR PIRATES - HOPEFULLY
The Al Rekayyat is surprisingly fast for such a large ship. It cruises at about 18 knots, a speed that the crew figures makes it too fast to be easily boarded by pirates.
Still, the crewmen are cautious. On the first morning of the voyage, crewmen wearing heavy leather gloves, padding and hard hats rigged up barbed wire and water cannons to ward off pirates. "This is recommended good practice," Rao said. "We look on with suspicious eyes."
Later that day, the ship entered the narrow choke point at the east end of the gulf, the Strait of Hormuz. Rao was on the bridge with a navigator, Ervin Markovic, and two crewmen scanning for trouble with binoculars. Shrouded in the heat haze above the pale green water, Iran lay ahead and to the port side of the ship. To starboard loomed a rocky outcropping from the coast of Oman.
The strait, through which about one-third of the world's waterborne oil exports travel, is one of those passages that mariners approach with a sense of trepidation. The high volumes of maritime traffic combined with narrow shipping lanes increase the risk of collisions. Just a few weeks before this trip, a cargo ship had been detained by an Iranian gunboat.
"You don't know what to expect," Markovic said.
The cargo carries its own risks.
The greatest danger, experts say, is that the liquid might escape and expand into a flammable, asphyxiating cloud. On a ship like the Al Rekayyat, the LNG is contained in special tanks designed to minimize the likelihood of leaks.
OBSESSIVELY CAUTIOUS
LNG requires a near obsession with precautions, drills and safety. Shell's rules prohibit taking devices like mobile phones or cameras that could spark an explosion on deck. Alcohol is not permitted. Crew members rarely go outside unless for work.
Miroslav Ahmetovic, the chief officer, spends much of his workday in a room below the bridge monitoring the LNG cargo on screens that display indicators like pressure and volume. Every few hours he dons hard hat, gloves, goggles and protective clothing and goes out on the sweltering deck to see that nothing is amiss.
"I want to make sure my video game conforms to reality," Ahmetovic said, emphasising the constant vigilance that Shell requires.
More than a day's journey away from India, the ship's crew was already preparing for port. Ahmetovic gradually began easing open the valves to the LNG tanks, letting the cold fluid gradually chill the pipes so they would not crack from sudden cold.
"If you don't treat the cargo right, it will break the ship," he said.
Rao stood on the bridge with a crewman at the wheel testing the engine and the steering. He even tried a full reversal of the engines, which might be required in an emergency. Gathering his officers around him, he warned them to pay close attention unloading the fuel so there were no mistakes.
"If you are idle, ask yourself what you are missing," he instructed.
INDIA CAN'T GET ENOUGH
On the fourth day, the Al Rekayyat eased through the narrow harbor entrance, coming to a halt at a modern jetty. From there pipes took the fuel to two large storage tanks, which fed the liquid into a long series of cylinders and other vessels. The fuel is gradually rewarmed back into a gas, so that it can be piped into the Indian pipeline network outside.
The terminal area is almost spotlessly clean, with staff members dressed in neat blue uniforms. Outside the gates is a different matter. Trucks grind along muddy roads lined with ramshackle shelters. Families drawn by the prospects of work in the factories camp under bridges.
Nilay Vyas, the general manager of Hazira, says that the pipelines buried in the ground outside the terminal are monitored by an optical fibre system that would "give a signal in case of unauthorised work." A patrol also goes out at least four times a day, he says, to check in person.
Shell, which has made a bigger bet on gas than any of its rivals, opened the Hazira terminal in 2005 with the French giant Total as a junior partner. The terminal, the company figured, would supply the power plants and factories in the fast-growing industrial areas nearby.
In the early days, Shell struggled to find customers, until the state's gas distribution system was expanded and Hazira connected. Now, the Indian economy is growing at a decent clip and the country faces an energy shortage. Customers, says Shell, are lining up, viewing LNG as a clean, reliable source of energy.
Maarten Wetselaar, the head of Shell's global gas business, said Hazira's gas receiving and processing facilities were "completely sold out."
"Even if you begged us on your knees for a slot," he said, "I don't think in the next 12 months we could accept another cargo."
The New York Times