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Is LNG Development Dying as Oil Prices Slide?

The idea of converting natural gas to liquid form in order to export vast amounts of U.S. shale gas to international customers has caught the attention of U.S. drillers, energy export entrepreneurs and energy-hungry customers around the world.

LNG Tanker

LNG tanker

Prospective customers abound. Across the Atlantic, you’ve got European countries wanting to lessen their dependency on Russia as their primary supplier of energy. And across the Pacific, Asian countries are seeking cheap energy to feed a rapidly growing middle class economy (China) and to replace nuclear reactors (Japan) with a reasonably priced alternative–natural gas. After its reactors were taken offline in the aftermath of Fukushima, Japan, with no oil and gas resources of its own, has imported and burned $100 per barrel petroleum to generate electricity since 2011, jeopardizing an already struggling economy.

Cheniere Energy Corpus Christi LNG Export Plant Rendering

Cheniere Energy Corpus Christi LNG Export Plant Rendering

With energy-hungry global customers lining up for the booming natural gas production in the the U.S., the shale revolution has sparked a development boom for liquefied natural gas (LNG) export facilities, the plants that convert the gas to a liquid.  Expensive, large scale LNG import projects have been on the books around the Asia-Pacific as well and with an international price structure for natural gas tied to Brent crude, the slumping oil price has clouded the future of LNG projects globally, affected by the tightened margins and slowing demand. It’s economics: what happens if you need to get $13-$15 per thousand cubic feet (Mcf) to make an LNG exporting venture economic, but the international price has dropped to $7 per Mcf?

In an Oil & Gas Journal webcast titled “Global LNG: Adjusting to New Realities,” James Jensen, President of Jensen Associates, and James Bowe, Jr., Partner of King & Spalding’s Global Energy Practice, offered their take on a global LNG market that has been thrown for a loop in the midst of the new commodity environment.

Bowe channeled Charles Dickens to begin his presentation, referring to the old adage of “It was the best of times, and it was the worst of times.” E&Ps worldwide can relate to the latter part, and the cost-intensive LNG projects are certainly no exception. The falling price of crude has had a downward ripple effect on other commodities, including the premium spot prices of markets overseas from North America. “We’ve entered a golden age for consumers given the availability and prices of natural gas,” Bowe said.

lng-march

Source: FERC

The Worst of Times

The producers on the LNG side are now struck with a difficult conundrum: move billions of dollars worth of projects forward in a very volatile market or shelve projects, possibly for good. For some projects, moving forward is their only option, including Cheniere’s (ticker: LNG) Sabine Pass which is scheduled to come online in 2015. Three additional U.S.-based export terminals in Texas, Maryland and Louisiana have finalized the investment decision process and are scheduled for construction.

However, the high premium of LNG prices overseas has evaporated. The 50% decline in the price of Brent crude oil has weighed on the LNG markets worldwide and driven down prices in Asia. Estimated LNG spot prices for Korea and Japan have declined by nearly 40% since August 2014. China and India, which Bowe referred to as the “great hopes” of the LNG industry, have dropped by roughly the same amount. Landed prices for all four regions are below $7.00/MMBtu.  

Source: The Australian

Source: The Australian

The price shock has put some early-stage projects on the skids, including Excelerate’s Lavaca Bay project, which Bowe does not expect to be revived. Several other projects in Australia are facing uncertainty due to the skyrocketing construction costs, which have become “completely out of control,” said Bowe. According to a May 2014 report by KPMG, 10 out of 12 worldwide LNG projects (most in Australia) are either behind schedule or exceeded its preliminary budget by as much as 50%.

Spotlight on Canada

The panel fielded several questions on Canada’s future on the LNG sphere. British Columbia in particular has been pushing hard to construct an LNG plant but to no avail. Current LNG infrastructure in Canada is minimal. Three LNG terminals, including midstream buildout, would cost anywhere from $190 billion to $280 billion, according to Ernst & Young. Apache Corp. (ticker: APA), which held interests in Australian and Canadian projects, was vocal for several months in its intent to exit some LNG projects. The company sold its stake in the mentioned projects in December 2014 for $2.75 billion.

“Canada is just holding its breath right now,” said Bowe, who believes “the ship has sailed” for capital-intensive projects in B.C. Jensen agreed, even though the western province has sweetened the pot by lowering royalties and taxes. “I believe B.C. had a very unrealistic view on how profitable an LNG project could be,” he said.

That includes projects even further north into Alaska, which has had a project stuck in neutral for decades. “LNG exports in Alaska are 20 years away – they were 20 years away when I first joined the business in 1982,” said Bowe.

Future Factors

The shine of future markets throughout Asia has worn off to a certain extent, due to recent political developments. Japan had previously shelved its nuclear program following the fallout from the Fukushima meltdown, but has since cautiously opened the door for nuclear progress after a system overhaul. China signed a monumental deal with Russia that will supply the country with 2.4 Tcf of gas annually for the next 30 years, taking a sizable piece of the China’s demand market. LNG projects underway in East Africa also have a considerable geologic advantage over its North American competitors.

lng contract

Source: Jensen Associates

 

Bowe and Jensen were both bearish about near-term growth prospects, saying LNG demand flattened in 2014 and is not expected to truly ramp up until 2018. “Until then, we could be heading into a LNG supply glut,” warned Bowe. Global LNG capacity is set to increase to 400 million tons per annum by 2018 – more than one-third higher than the current amount of 290 million tons per annum.

Despite recent pledges from the Department of Energy and the Federal Energy Regulatory Commission (FERC) to increase application turnaround times, Bowe isn’t impressed. “The permitting process in the United States just gets more complex and more time consuming – sometimes to the point where it’s painful,” he said, adding that any project completed within three years by the FERC is a “best case circumstance.”

Canada has a much quicker turnaround time. However, our neighbors to the north have to jump through United States regulatory hurdles if they aim to source their gas from American soil. In the meantime, it may become more difficult for North America to compete on a global LNG scale.

There are some in the industry who remain optimistic about the future of LNG in the United States, however. Anatol Feygin, Senior Vice President of Strategy & Corporate Development of Cheniere sees tremendous potential in the U.S. LNG industry. Speaking with Oil & Gas 360® during an exclusive interview, Mr. Feygin said, “We think the North American market in particular offers some very attractive advantages in how the LNG is priced and sourced… if there is an example of American exceptionalism, than we think this unconventional hydrocarbon development is one.”

Source: Gazprom

Source: Gazprom

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.