LNG macro analysis, page-2011

Interesting banter floating around considering the quietness surrounding the failure thus far to make inroads on the BTA front. I’ve had GV under the microscope over the last few years, scrutinising his every move, his character, his genuinity and overall capability to be a formidable leader to deliver on promise! Has he failed to live up to expectations? Not in my books.

Undoubtedly there’s been a herd of critics and to a degree, deserved in light of over optimistic projections for FID or choice of wording that would bait us into believing we’re on the cusp of dream announcements. We’ve been sold a wonderful, fairytale story that has certainly kept us captivated, on edge and drained all at once.

What achievements has our CEO achieved since the beginning of his tenure:

Secures $1.5B equity financing from Stonepeak, more than doubled ($660M) from previous contract.

.8mt increase in capacity - why bother if chances of success were diminishing IDG - jumping on the LNG bandwagon who have immediately elevated low level talks with Chinese counterparties to high level talks. He wasn’t responsible in bringing their company to the table but is still under his watch.

EPC contract with KSJV keeps getting extended every 6 months.

We cut ties with Meridian to free up capacity. Meridian was not at the same stage as readiness as Magnolia and as a small organisation faced challenges having conditions precedent that were generally associated with their ongoing sales arrangements and relationship to UK gas economics.

A negative - Knocked back a potential move to a US stock listing, a decision I was disappointed about! A missed, golden oppourtunity to see a substantial increase in SP to where we are today - in light of our bright, fledgling prospects as a company that will effectively modularize/ lower cost in a faster, more standardized, highly efficient, highly reliable way! Basically inventing how lowest cost gas is produced!

GV’s true performance can only be judged within a quarter (my timeline) of the trade war reaching a resolution, preceding conclusion of trade signing summit.

We’ve strategically been focusing our marketing efforts towards China. Here’s where alternative options lie for major LNG markets;

South Korea - Not looking to expand capacity until after 2025/ have contract re-negotiations up for grabs, those being... 7mt 25yr deal with Qatar that began in 2000 & 4.1mt 25yr deal with Oman that began in 2000. In the Platts report on 1 March 2018, it said Kogas will seek to diversify its LNG supply sources to include Russia and the US to ease its dependence on the Middle East and SouthEast Asia. " Kogas has started preparations for new term contracts and seeks to sign new deals at least 5 years before existing contracts expire " , the company official said.

Japan - Demand declining due to more start-ups of nuclear reactors. Not looking to expand capacity for the foreseeable future. We would be targeting their contract re-negotiations with; Qatar 5mt expiring in 22/23', Australia NWS 2.5mt expiring 24', Australia Darwin 3mt expiring 23', Malaysia 3.62mt expiring 24/25', Brunei 3.4mt expiring 23'.

India - India is being pressured to reduce carbon emission levels, the country announced it will double the share of natural gas in the energy mix to 15% by 2022 which will cause a hike in imports and huge capital investment inflow for the construction of LNG terminals in the coming years. India is already experiencing growing consumption of crude oil and coal, and their associated pollution levels. As a result, it was proposed that a balance be reached in the energy consumption pattern by doubling of the percentage of natural gas to 15% in the energy mix by 2022. With limited natural gas reserves in India, the imports of natural gas which stood at 12.89 billion m3 in fiscal year 2011 has increased by more than 200% to 26.33 billion m3 in fiscal year 2018 despite there being fewer LNG terminals. This report reflects a convincingly positive outlook for natural gas utilisation in the country and for future growth as a gas economy between now and 2022. Local distribution companies and interstate and intrastate pipelines appear to be more confident in future growth, but oil and gas producers are not far behind. But what is feeding the optimism in the industry participants? India, in particular, is poised to capitalise on low oil prices to embark on new projects.

I can tell you 15 terminals proposed for a total of 58.5mt and if all were to go to construction, the country would require 43.8mt when taking into account their terminal utilisation rate of 75%. Currently has 28mt under construction meaning once commissioned will require 21mt (75% Util Rate) minus 8.7mt if they keep importing that amount from the spot market, which was recorded in 2017. There’s a couple of question marks with targeting India’s market, 1) Their credit worthiness + always looking to re-negotiate contractual terms during life of contract, are factors that do not sit well with producers. 2) Concern about demand for imported gas in India - Shell and Engie gave that very reason for exiting a 5mt project partnered with Gail/ AP&G at Kakinada in Andhra Pradesh. Plus their coal production and consumption has increased each year for the past 5; Production 236.8mt (2017), 229.3mt (2016), 226.2mt (2015), 216.9mt (2014), 205.8mt (2013)... Consumption 341.3mt (2017), 326.5mt (16’), 318.2mt (15’), 311.9mt (14’), 282mt (12’).

Taiwan - 3 terminals proposed totalling 12.5mt (Taoyuan 6mt, Keelung Xiehe 2.4mt, Taichung 4.1mt). The last 2 years their Utilisation Rates have been a crazy 118% (2017), 113% (2016) so you can ascertain their future requirements would be 14.3mt if say @ 115%.Myanmar- 5 terminals proposed for 15.5mt. Would be a new entrant in the import market in which case I always give a worst case Utilisation Rate of 35% (Global Utilisation Rate average in 2016 was 41%). Requirements could be 5.4mt.

Germany - 2 terminals proposed in Wilhelmshaven 8mt, developer Uniper + one in Brunsbuttel 3mt, developers Vopak/ Gasunie/ Oiltanking. Utilisation rates are really low in Europe with Italy being the highest 40%, followed by France 35%, Spain 21%. If Germanys usage is at 35% = 3.85mt.

Thailand - 9mt Nong Fab terminal developed by PTT. Construction will begin shortly. 2017 Utilisation Rate 50% = 4.5mt requiring.

Italy - 3 terminals have received full authorisation and are priorities for Italy's government; Enel's Porto Empedocle terminal in Sicily 5.9mt, Medgas's Gioia Tauro terminal in Calabria 8.8mt, Api Nova Energia's Falconara Marittima terminal 2.9mt. 2017 Utilisation Rate 40% = 7mt required.

Pakistan - Currently has 2 terminals online, 1 under construction totalling 14mt capacity. Utilisation Rate is unknown but already has contracted 9.6mt which would equal 69%. In July 2017, Petroleum Minister Shahid Abbasi quoted, " within 5 years I don't see any reason why we should not be beyond 30mt in annual imports. We will be one of the top 5 markets in the world." Mitsubishi, Total/ Vitol, Trafigura & Exxon/ Energas 5.6mt have all proposed terminals.

European customers are not on our radar, never have been and has only been touted once by our company (mentioned last Nov Sydney AGM). Europe’s demand is definitely growing but they still have problems building infrastructure while also having really low utilisation rates! Although Europe holds roughly 20% of total global regasification capacity, regasification utilisation rates have generally been low, averaging 27% in 2017 (up from 25% in 2016). LNG regasification capacity followed by regasification utilisation rates for European countries in 2017 were;

Italy 11mt, 55%
Portugal 6mt, 48%
France 25mt, 30%
Spain 50mt, 24%
Belgium 7mt, 16%
UK 35mt, 14%
Netherlands 9mt, 9%

Competition from pipeline gas coupled with weaker gas demand in the power sector have led to lower regasification utilisation rates in recent years. Record pipeline imports from Russia and Norway have further squeezed LNG in many markets. Nonetheless, LNG imports into Europe increased in 2017 owing to unusually high power demand after a hot and dry summer, reduced hydropower output, and higher coal prices. As I’ve made known before, domestic gas production in Europe is also on the decline. Only three new European regasification terminals have been completed in the past three years, in Poland, France and Turkey. Given low regasification utilisation rates across Europe, significant increases to regasification capacity may not be required despite the anticipation of higher LNG imports into Europe moving forward.

Maybe a European buyer may jump in out of the blue in fear of missing out when we sign a couple of BTAs but the above stats tell the story as to why going after European buyers IS but not really in our best interests or worth the effort!

As hard as it is to accept, I feel we are where we should be in this challenging, tough market. VG has started construction while Anardarko Mozambique is ahead of us for sure, within touching distance of FID. LNG Canada, Golden Pass, BP’s Tortue FLNG all took FID on their balance sheets.

GVs statement at the Shanghai LNG conference, “ I would say my level of urgency is getting higher every day until I sign. Desperate? Not the slightest. GV, JB, Rafael Hernandez, our entire crew are just as eager to get to construction as we are and I know our leader is feeling the heat from loyal shareholders. My bottom line... his true, overall performance can only be judged within a quarter (my timeline) of the trade war reaching a resolution, preceding conclusion of trade signing summit.

There’s a healthy queue of companies heavily reliant upon the Chinese to help sanction their projects;

Woodfibre - HOAs with Guangzhou Gas 1mt 25yrs + CNOOC .75mt 13yrs 23’

Delfin - HOA with China Gas Holding - 3mt 15yrs

Cheniere - Sinopec 2mt 20yrs.

Tellurian - CEO Meg Gentle noting, whenever the dispute is over, “ Tellurian and Chinese buyers stand ready to do transactions."

Woodside - HOA with ENN 1mt 10yrs.

The Chinese Government has to give authority to their state owned companies when allowed to move from negotiations to completion with US projects. 3 GV responses referencing this notion;

Sydney Morning Herald report, Jun 27 2018 - Greg Vesey, its chief executive, said: " We were in a meeting with a potential customer, who said they weren't going to make a move until “ it has been clarified what is happening with these tariffs."

Bloomberg report, Jun 27 2018 - Trump administration’s trade dispute with China is delaying one US company’s bid to sign long-term natural gas export deals. While liquefied natural gas (LNG) is excluded from the trade tariffs imposed in recent weeks, buyers are waiting to see whether the powerplant and heating fuel will be roped into the spat, said Greg Vesey (picture), CEO of Liquefied Natural Gas Ltd. The developer is in “advanced” discussions to sign 20-year deals for its US$4.35 billion (RM17.4 billion) Magnolia LNG export project in Louisiana, but a number of parties have indicated they’re waiting to see how the tensions shake out before making final decisions, Vesey said in an interview in Washington on Monday.“ We’re kind of sitting back and waiting for this whole tariff and trade war thing to settle down,” for potential buyers, he said. “ Has that affected the timing of their decision? Absolutely.” Still, negotiations are ongoing for Magnolia. China and other Asian buyers may contract 50% to 70% of the proposed terminal’s capacity, with the ability to export eight million tonnes per year of LNG, he said. Europe and the rest of the world would make up the rest. Buyers are comfortable with pricing those long-term contracts to the US Henry Hub benchmark in Louisiana, he said. That would be the equivalent of about 8% of Brent crude, a discount to the 11% or 11.5% cost that is being discussed in the global market these days, according to Vesey said.

Financial review report Oct 28 2018 - There are varying views on how and when the trade issues with China will be resolved, Vesey said on Monday." Considering that, our communications with potential Chinese offtakers remain robust with the intent to complete agreements if trade tensions abate before Magnolia is fully sold out," he said.

As Mr Walker said, it was an unusual step to declare our pricing point to the world in Shanghai and the company has been defiant in revealing such information at AGMs, phone conferences or when I’ve posed the question in person but I can’t see any harm in throwing it out there at this juncture in the game. We must try and coerce buyers by any means possible and get the word out there. Legendary Charif Souki used a similar tactic at the Gastech conference in Chiba, Japan April 4-7 when he proposed offering cargoes delivered to Japan at a flat $8 per mmbtu from 2023 but they were wary of locking themselves into a price that may eventually work to their disadvantage.

I believe our CEO & Co have been transparent, accessible and open during this epic journey. Although I agree MB, GV has speculated numerous times on when we could reach FID, it’s been out of his control not being able to secure customers. We’ve been able to control the controllables, important requirements that have allowed us to remain at “ shovel ready “ readiness... can’t ask much more for the time being! Remember, when Cheniere signed a 1mt BTA with Trafigura on Jan 16, 2018, the last time a US company had signed a contract before that was way way back on Oct 28 2015, Cheniere locking in Engie for .90mt. Outside of Cheniere signing 4 contracts with Asian counterparties in 2018 (2 with CNPC, 1 with CPC, 1 with Petronas), do you know how many other proposed, worldwide projects secured Asian customers amongst the big guns namely KOGAS, CNPC, Sinopec, CNOOC, CPC, PTT, Petronas, GAIL, Petronet, Japanese? Just 2... Anardarko securing Tohoku for .28mt over 15yrs & Qatar securing CNPC for 3.4mt over 22yrs. Only 2 US companies signed up European customers in 2018 - Cheniere with PGNiG & Venture Global with PGNiG + Galp (at historically low prices between $2-2.25). It’s not logical thinking to have expected LNG LTD to follow suit because there’s no evidence to suggest so.

In finishing up, will leave a few tidbits to keep in mind, including a couple of videos I thought may be of interest...

SHANGHAI Reuters report April 2nd 2019 - China’s imports of liquefied natural gas (LNG) could reach 110 billion cubic meters or about 80 million tonnes a year, by 2025, a senior executive from China National Petroleum Corp (CNPC) said on Wednesday. China’s LNG imports last year were about 54 million tonnes. “ LNG price will become one of the decisive factors for the amount of LNG imports,” he also said in his presentation. And that will become even more important with the startup of the Power Of Siberia gas pipeline between China and Russia - expected later this year - that could threaten LNG imports, Ling Xiao told the LNG 2019 conference in Shanghai.

CNPC has already contracted with Gazprom for a SPA worth 38BCM (28mtpa) over 30yrs. One could assume a majority of that 26mt of LNG China might be looking for will come from the US!

Statement from one of our company representatives, “ With China, there appears to be plenty of demand! Many offtakers also know they need to help FID new greenfield projects to ensure future supply “.

https://www.bloomberg.com/news/videos/2019-03-26/china-will-be-largest-market-for-lng-exports-tellurian-ceo-says-video

https://www.bnnbloomberg.ca/company-news/video/there-is-real-potential-for-lng-in-china-says-woodside-petroleum-s-ceo~1652179

Our “ shovel ready “ status is STILL an advantage. Mike Mott is communicating with the banks on a regular basis and we shouldn’t have much difficulty securing debt financing if we ensure our offtakers are credit worthy.

GV is finally about to get his moment in the sun when China and the US sign a historic trade pact seemingly in the very near future! I believe our company is on track to deliver!

Will deliver!

JK.