Shell, Exxon, Total & Woodside chiefs see opportunity in LNG The...

Shell, Exxon, Total & Woodside chiefs see opportunity in LNG
The Australian

As the world’s most powerful oil and gas executives gathered in a rain-soaked Perth during the week to talk LNG, the somewhat surprising mood that prevailed was one of opportunity.

Despite depressed prices and a boomtime oversupply hangover that will not ease for at least five years, top executives at Shell, Exxon Mobil, ConocoPhillips, Total and Woodside Petroleum all talked up the growing ability of the industry to actively spur significant new demand.

With LNG prices down, technological advances that let smaller, poorer countries join the traditionally elite LNG-buyers club without the need for expensive infrastructure are gaining momentum, as is the potential to use LNG for marine and trucking fuel.

And providing a tailwind is a Paris climate agreement and global anti-pollution laws that should encourage the use of gas over coal and marine bunker fuel.

So while the industry chiefs who this week attended LNG 18 admitted the industry was facing tough times, there was a silver lining less in evidence the last time the industry met in similar force nine months ago in Paris.

“Market conditions in general are challenging, but at the same time, new markets are opening up — markets like Thailand, Pakistan and Poland,” Shell chief Ben van Beurden told the conference, which was the biggest gathering of top oil and gas executives in Australia since 1998.

“In the past, these markets were too small to consider. But the rapid growth of floating re-gasification facilities, among other things, has considerably lowered access costs for importers and provided more flexibility across the value chain.”

The optimism is welcome for Australia, which is set to overtake Qatar as the world’s biggest LNG exporter by 2020 after $200 billion of boomtime construction approvals. Unfortunately, the projects are starting to come on line at a time of low prices and stuttering demand from major players Japan and China, exacerbating a global surplus.

Despite the market malaise, Origin Energy managing director and LNG 18 chairman Grant King said the Perth conference was more buoyant than the World LNG summit in Paris in June.

“The gas story was a bit depressed at that time, but today there is a greater sense of optimism about the future,” King said.

“What’s happened between now and then is COP 21 (the UN climate accord struck in Paris in December).”

The hope is that despite surprising growth in coal of late thanks to cheap prices, governments will legislate to encourage the use of gas in power ... to fulfil their commitments.

ExxonMobil, the world’s biggest and most profitable oil and gas company, is not an organisation to talk up opportunities unless there are signs of a significant shift in the wind.

So when its Houston-based head of gas and power, Richard Guerrant, calls for action to grasp opportunities to drive more demand, the industry tends to listen.

“Now is the time, with an oversupply, and there is plenty of opportunity to develop these new markets,” Guerrant said. “We’re seeing an extension of new markets and buyers around the world. South Africa and Morocco are planning for LNG imports, Panama and Colombia are entering the LNG marketplace, Indonesia is becoming a significant LNG importer, while Bangladesh and new areas of India are becoming LNG importers.”

As in the US shale oil and gas boom that turned the energy market on its head and brought down prices, it is technology spurred by present market conditions that is starting to move the dial on new demand.

A big driver of the shift is cheap floating import terminals that can turn the frozen LNG back into gas at a fraction of the cost and in much smaller quantities than the big, multibillion-dollar regasification terminals traditionally required.

Citi estimates this could spur more than 50 million tonnes a year of extra demand by 2025.

At a cost of about $US100 million ($130m) each, the floating storage, regasification units (FSRUs) are essentially converted LNG tankers with a heat exchanger at the front.

They do not require the big purchase commitments that have been necessary to build import infrastructure and have for a long time limited demand to wealthy, gas-hungry nations.

“The expansion of floating re-gasification, I think, is a real market-changer,” Woodside chief Peter Coleman said.

“It’s a very cheap entry into the marketplace and it provides opportunity for new markets to develop.”

Citi analyst Christian Wetherbee says the global import capacity of FSRUs has tripled to 30 million tonnes a year in the past five years.

“The flexibility that comes with FSRUs provides the opportunity for countries that are short of gas to respond to the oversupplied market and buy cheap gas,” Wetherbee says.

“We expect that demonstrating gas supply into a market will create further demand growth, allow the building of permanent onshore facilities or signing larger FSRUs on longer-term contracts, effectively opening up new markets to LNG.”

The other new source of potential demand widely talked up by the majors is the potential to use LNG as a shipping, or bunker, fuel in the face of tightening International Maritime Organisation marine pollution (MARPOL) legislation coming into force in the next few years.

“Marine bunkering — everyone says, ‘well, that’s just a little thing’,” Exxon’s Guerrat said.

“We don’t know what the potential of marine bunkering is yet, but we think the estimates are more substantial than what we’ve seen.”

At the conference, Woodside announced it had chartered an LNG-powered support vessel from 2017, the first of its kind to be used in Australia. To do so, it will set up refuelling infrastructure in the Pilbara region.

“We’ve had to provide the bowser, but once you start working on it and people latch on to it as a good idea they will grab hold of it,” Coleman said. “It’s not a huge amount of gas now, but you could have 20 or 30 of these things, and then it could eventually get into the iron ore fleet, driven by MARPOL regulations.”

Shell’s head of gas, Maarten Wetselaar, said the combined market for marine and road transport fuel was the equivalent of 700 million tonnes of LNG a year, compared with current LNG demand of 250 million tonnes.

“If we can secure 10 per cent of that transport market, you’re talking about 70 million tonnes of LNG demand, which is almost as much as Japan uses,” he said.

Patrick Pouyanne, the chairman and chief of French giant Total, was more circumspect than most. But he, too, gave a nod to the opportunities.

“The whole market today is difficult, with the big wave of LNG, what was planned in Australia, and what was not planned in the US,” Pouyanne said, adding coal use was increasing even in countries that signed the COP 21 agreement.

“This requires us to go back to the basics, let’s work hard to create demand. I believe with innovation, technology, we have capacities to create vast gas demand, and emerging countries require gas.”

So it's not all doom and gloom and given the progress made over the past couple of years, LNG is poised to play its part.

And remember whilst DOE/FE has not yet issued an order addressing Magnolia’s application seeking authorization to export 8MTPA to non-FTA countries, CFO MM commented he expects this during Q3.

Interestingly LNG filed its non-FTA application on 10th October 2013 (2 1/2 years ago).

Based on prior approvals for other FERC approved projects, it's simply a matter of time.

Bring it on!