Pandemic-driven lockdowns have taken their toll on small companies in every sector, while larger companies can take a longer view on matters, including in the LNG sector.
Broadly, there has been a shift away from liquefaction and a new emphasis on downstream plans. This shift has also provided the larger companies with new opportunities to increase the rate of expansion into the downstream.
Price signals have highlighted how the world has changed. Henry Hub has risen, making liquefaction in the US less appealing. European prices, TTF and NBP, have fallen, in part as a result of storage levels. Asian prices have also fallen, with some markers dipping below $3 per mmBtu.
There is a previously unthinkable convergence of prices that has highlighted companies’ places on the production cost curve.
Plans for new export capacity has become less attractive, as companies reconsider investments. There is around 100 million tonnes per year of capacity under construction.
Companies approved 70.8mn tpy of capacity in 2019, a record for final investment decisions (FIDs), according to the International Gas Union (IGU). Prospects for additional FIDs this year look challenging.
“There’s an increasing list of FIDs being postponed and it looks unlikely that additional major decisions will come in 2020. It is unclear just how long the impact of coronavirus may be felt,” said Bracewell senior associate Nicholas Neuberger.
There are some notable exceptions to the industry freeze.
“Larger companies have the ability to take a longer view. Qatar Petroleum [QP] is pushing ahead with expansion and while there are some delays the scale hasn’t been reduced,” Bracewell partner Nina Howell said.
Qatar produced 77.8mn tonnes in 2019, holding onto its position as the world’s largest LNG exporter in 2019, but is expected to slip behind Australia this year. Qatari expansion will take capacity to 126mn tpy.
The country demonstrated its intentions recently when it placed a shipbuilding contract with three South Korean yards. Qatar Petroleum said this was the world’s largest such contract, worth around $19 billion.
Integration and independence
LNG projects have tended to be built once long-term sale and purchase agreements (SPAs) have been signed. These have gone some way to reassuring financiers that risks are minimised.
There has been discussion of a shift to new contracting structures but progress is slow.
“Traditional large-scale export projects, which have extremely high capital expenditure requirements, such as Mozambique LNG still require a portion of LNG to be sold under long-term SPAs required to secure financing,” said Howell.
LNG projects have tended to be integrated, with companies liquefying their own gas. This model does not apply to the US, though, where companies can simply buy gas from the network.
Nigeria LNG (NLNG) also acts as a buyer of gas, the company’s CEO Tony Attah noted on a webinar this week. NLNG buys gas predominantly from its shareholders, which include Shell and Nigerian National Petroleum Corp. (NNPC).
NLNG took the FID on its Train 7+ project at the beginning of the year and secured financing in mid-May. This will involve a new train and debottlenecking on existing facilities.
The funding demonstrates the “robustness of our business and a belief in our brand”, Attah said. The company had successfully paid off debts in the past, which “lends more credibility to the brand”.
Financing does not appear to have been an issue for the project, with bank appetite for the debt outstripping NLNG’s needs. Nigeria’s government has designated 2020 as “the year of gas”, and the company is working on plans for Train 8.
“While prices are low, resources are hard to develop – but there is a justification for imports,” Howell said.
NLNG has been exporting gas since 1999. The company is considering participating in domestic supply of LNG. Attah cited NLNG’s success in delivering LPG to local markets as an instance of how such a trade could work.
The company has been in talks on a pilot project. This could then be scaled up to serve the region. “NLNG is a price taker at the moment but perhaps there is a future where we could be a market maker, with access to the full value chain. But there is still much to be done,” Attah said.
“Coronavirus could trigger a move to greater integration in the value chain. This would help companies smooth out some of the pricing ups and downs, although this does create some new complexities,” said Bracewell’s Neuberger.
“That said, many players have been working in this way for a long time and may not see pressure to change.”
Europe has a reputation as a market of last resort in the LNG trade.
A recent Oxford Institute for Energy Studies (OIES) report described US exports as the “marginal molecule” in the LNG market. US exports are easier to shut in than volumes coming from traditional take or pay contracts.
With prices low, and storage high, there is a chance that European prices turn negative in third quarter, Mike Fulwood and Jack Sharples wrote for the OIES.
The authors went on to say this trend is likely to continue into 2021. The only hope at balancing this out must come from Asia.
Bracewell’s Howell noted that Pakistan, India and Bangladesh might “see this period of low prices as an opportunity for the construction of more regas facilities”. As new entrants come into the import market, there is likely to be a shift to “shorter terms and hybrid financing”.
On the move
Recent changes in pricing have never been seen before, NLNG’s Attah continued. While the impact of coronavirus is unclear, the overarching question is that of energy transition.
Participants must consider a “lower for much longer scenario”, he said, but the switch away from in Asia is “a massive opportunity for gas and LNG. No energy mix scenario has renewables without gas, so gas will stay relevant.”
This question of a longer-term view has clearly underwritten NLNG’s success in signing new contracts for supplies from its initial trains. The company was marketing around 7mn tpy of contracts but demand substantially outstripped availability, Attah said.
Algeria is moving towards contract negotiations for 6mn tpy of its capacity, as oil-linked contracts expire in 2020-24, Arab Petroleum Investments Corp. (APICORP) said in its recent forecast. Oman is also looking to strike deals on 6.66mn tpy and Qatar 20mn tpy in this same period.
Given the LNG market’s continued reliance on long-term deals, these will be the markets to watch. For those companies with a long enough timeframe, there may be some bargains to be had in the next couple of years.