Does anyone still remember the US LNG import adventure? Seems to be a long way off. Today, everyone talks about the US becoming a huge LNG exporter. How about that?
Since I have gotten interested in LNG I don’t stop wondering, if anyone in LNG still takes the longterm nature of the business seriously. Of course, there are many, but they seem to be drowned out by the very short-term thinkers. And short-term thinking must prevail on the financing side as well as otherwise, I have a hard time imagining how those deals come together.
I have already dropped the hint in other posts. The Black Mamba problem. What happens if the LNG plant you build is way too expensive for the market you want to serve? Either you hype the market or you hide the true cost of building LNG terminals in the first place.
Sometimes, someone miscalculates and that is just what had happened to LNG imports into the US. I understand those who built the terminals and crashed. They need to find some other economic rationale to justify the expense.
Let’s look at the fundamentals. The US is exposed to both, the Atlantic and to the Pacific Ocean. That means that in theory, they should have easy access to both major LNG markets. Asia but also Europe. Asia, of course, looks like big nice ice cream on a hot summer day to a distressed LNG terminal operator. But there is also big competition on this premium LNG buying region.
A swirl of Australian projects will see the light of day over the next years. Their economics are questionable but they will become operational so their volumes will hit this market. No question here. There is a whole roster of East African projects coming up – all of them fundamentally geared towards Asia. And then there is a lot of effort to bring Atlantic basin LNG into the Asian region as well in order to snap up some of the juicy premiums. So its everyone on everyone’s throats. Asian customers will love the attention of so many sellers but I doubt that this will have much uplifting effect on prices.
Building LNG export capacity is a very longterm development (up to 2020) so let’s not forget that little if any at all LNG supply will emerge from the US before that year. That’s not going to solve some of the most pressing problems for distressed would be LNG buyers.
There is also the feed-gas price issue. You sure think I am crazy. North American gas is the cheapest on the planet now, so there is no better feedstock for LNG production. But that’s not entirely true. I still remember well that some years ago we used to apply sub-one USD per MMBtu feed-gas prices to new LNG projects in order to make them economically viable. Henry Hub has not been that low since – well not once since I know what Henry Hub actually is.
Let’s remember that Qatari LNG is produced at less than 2 USD FOB. That would include gas production and conditioning as well as liquefaction. That means technically, Qatar (and many other producers) is able to produce LNG FOB at a lower price than the US feed-gas price would be. In some cases, even the DES cost to Qatar would be less than the US feed-gas price. The US projects have to compete with that.
Then there is the price risk. If you contract with a classical LNG project in – let’s say, Africa – the feed-gas price is a function of the upstream cost. When I looked at upstream LNG projects, we always looked at feed-gas at less than USD 1. Admitted, the US gas feed would come pipeline grade and stabilized which usually is a cost factor with regular upstream LNG projects as well but that factor can be boxed in very reliably.
Henry Hub is on the exact other extreme – its the king of volatility. Any buyer considering LNG from the US also swallows the price risk of North America. But hey, you will say. What price risk? This is North America. Natural gas prices will be the lowest on the planet for the next 400 years because of all that shale we have here. I beg to differ. I have seen those claims many times in the past. They almost always are wrong.
Then, what if Henry Hub goes expensive again? With all the gas hype in the US today, all the new uses for gas in the US, all the gas-hungry industry investment and now LNG export on the table, don’t tell me that this cannot happen again. What then? What if Henry Hub goes 15 USD again? Or more. As a buyer, you are toast. Even as an Asian buyer. Real upstream LNG projects can guarantee their feed gas price for the duration of the contract. The US projects cant as they buy feedstock on the market.
I swear I would be a zillionaire with his own island in the Caribbean if I just could look 5 minutes into the future. The fact that I am living Mr. Normals life in a Central European city shows that my crystal ball gazing skills are modest.
The great Winston Churchill said that an expert is the one who predicts the future and then can explain why he was wrong. Let’s see how many experts we will have on this one.
But there is the usual silver lining. Didn’t I mention that I am a nutbag LNG fan? There indeed is a market where US-produced LNG would make a huge difference. And it’s right on the US doorstep. The Caribbean.
It’s an island world where Natural Gas is pretty unused.
It’s hard to build pipelines throughout that area. Its all subsea, expensive and the markets at the end of the pipe are each pretty tiny. Why has classical LNG not taken hold yet? Easy.
One single regular LNG tanker holds a darn lot of gas in its belly. That’s not an issue for a biggish market in Asia, Europe or indeed the US. But for an island such as Barbados for example, this would last a really long time. You need to dump the cargo in order to liberate the vessel or you use the vessel as floating storage which makes the exercise an expensive one.
But if smaller vessels could be used the economics look very different. Small vessels just make economic sense from a nearby distribution hub which could be a Gulf coast terminal. Small LNG transport vessels such as those employed by Antony Veder would make all the difference.
And again it’s the old “taking a shot at diesel” game. US produced LNG competing with classical LNG projects – that’s going to be ugly. But US-produced LNG replacing dirty diesel with LNG and pushing for a change in the Caribbean island world. That has star qualities.
Of course, it’s not the huge quantities everybody loves to see in Asia. But its a solid business plan. And it involves hard, mind-numbing, bone-wrenching business development work. No big bang that takes all the problems away.
But more on that in another post. Stay tuned.