Deep pockets to win the LNG race
Fereidun Fesharaki.
Global energy giants have thrown out the rule book and are forging ahead with several new liquefied natural gas projects without locking in long-term customers, which should ring alarm bells for Australia's relatively small players, says LNG market guru Fereidun Fesharaki.
Dr Fesharaki, chairman of consultancy Facts Global Energy (FGE), said that 75 per cent of the wave of recent final investment decisions in LNG projects, which include Shell's $US31 billion ($44 billion) LNG Canada and the $US10 billion Golden Pass project in Texas by ExxonMobil and Qatar Petroleum, have been taken by backers able to finance the mega-projects from their own balance sheets.
The profound market change poses huge challenges for smaller companies that need to underpin their mega-investments with long-term contracts, given buyers' reluctance to commit to such deals and the race is on to bring new LNG projects online to meet a market "window" expected to emerge in 2023-24.
There's a race on by LNG producers to get their project in the fast-growing queue. Robert Shakespeare
"The guys who need customers will have a problem; if they wait to sign contracts they will be too late," Singapore-based Dr Fesharaki said in an interview during a visit to Australia to meet with the boards of Santos and Caltex about LNG, oil and refining.
"Deep pockets win the race."
Aside from Shell, Exxon and Qatar Petroleum, France's Total, Italy's Eni and Malaysian national oil company Petronas are all using their own funds to press ahead with LNG projects on the assumption the gas will go into their global portfolio, in what Dr Fesharaki says is "turning the business upside down".
"It's the first time in 40 years that I have seen the business change so fundamentally," he said.
Among the Australia-listed players seeking to give the green light for LNG projects in the next two years are Woodside Petroleum at its Scarborough and Browse fields in Western Australia, Santos with its Barossa project to supply the existing Darwin LNG plant and Oil Search with its expansion in Papua New Guinea, in which Santos is also involved.
Develop some control
Woodside chief executive Peter Coleman has signalled the company is prepared to move ahead with the $US12 billion Scarborough project with just half of the capacity committed under term sales contracts to try to take advantage of lower construction costs without locking in sales prices at current lower prices.
Asia is driving expected growth in LNG demand. Shell
"You're seeing all the big players, they are getting their projects ahead but they're not necessarily going to a buyer. They're running it into their portfolios," Mr Coleman said last month.
"That business model is changing quite quickly ... You need to develop some control over the way your portfolio moves so that your projects can move forward at the right time in the cost cycle."
FGE is estimating that after a dearth of new projects going ahead in the last few years, some 180 million tonnes of new LNG capacity will get the green light between 2018 and 2022, all looking to come online in 2024-26.
Ahead of that, it anticipates a shortage hitting the market between 2021 and 2024 once the current wave of new supply coming into production is absorbed by rising demand.
The rate of new LNG supply coming online is expected to slump. Shell
That new supply wave, combined with a milder winter in the Northern Hemisphere, has helped push north-Asian spot LNG prices down to $US6.16 per million British thermal units, a 17-month low and down almost 50 per cent since September.
Dr Fesharaki expects the market to remain weak through 2020, after which demand should catch up with supply, resulting in an "amazingly tight" market by the end of 2021.
"Cycles are alive and well in the LNG business," he said.
Shell, the biggest non-government-owned LNG producer, warned this week in its annual outlook for the fuel that a "mismatch" between the need of suppliers for long-term sales contracts to secure financing and buyers' increasing appetite for shorter, smaller and more flexible contracts needs to be resolved to enable developers to go ahead with new projects.
Shell is forecasting demand for LNG will rise to about 384 million tonnes in 2020, up from 319 million last year, with the market having more than trebled in size since 2000.
https://www.afr.com/companies/energy/deep-pockets-to-win-the-lng-race-20190301-h1buyo
