Gastech ’14: Suppliers say high LNG project costs will complicate pricing pacts

By ADRIENNE BLUME

Goyang City, KOREA  -- After a delegate luncheon sponsored by Oman LNG, the first day of Gastech 2014 continued with an afternoon panel session on strategies for securing Asia's gas demand, from a supplier-side perspective.

Moderater Mark Rowley, a partner at Baker Botts LLP, noted that the emergence of new LNG projects would be a large determining factor in the price of LNG going forward. "Not all projects are created equal," Rowley said. Greenfield and brownfield projects around the world have different elements that will affect the price of LNG supplies from these projects.

LNG: Brownfield vs. greenfield. Among the panelists was Pierre Breber, the corporate VP and president of Chevron Gas and Midstream. He expanded on Rowley's ideas by separating the LNG supply wave into brownfield and greenfield projects. "My view is that we're going to need all sources of natural gas supply to meet Asian gas demand in the years ahead," and LNG will be key to meeting this demand, he said.

By 2025, Asian demand for LNG will double, and new brownfield LNG projects in the US will be needed to meet this demand, Breber said. The advantages of brownfield LNG projects include access to low-cost gas resources, in-place pipelines that can be reversed, and tanks and jetties that are already built. However, the risks of cost escalation and project delays still exist.

Breber then discussed the next wave of LNG after the US brownfield projects come onstream. Greenfield projects represent a 100-million-ton-per-year (MMtpy) supply opportunity. The next wave of LNG will require a different value proposition, however. For example, LNG buyers must be invited to take upstream ownership, and "buyers and sellers must come together on contracts that are mutually beneficial."

One direction for LNG project costs: Up. Another panelist, Rob S. Franklin, the corporate VP and president of ExxonMobil Gas and Power Marketing, spoke to the competitiveness of natural gas and the issue of supply diversification. ExxonMobil expects LNG demand to triple to 650 MMtpy by 2040, with Asia-Pacific providing more than 75% of that demand.

Franklin sees further geographic diversity of LNG supply with new players entering the market. Presently, around 60 LNG projects are under consideration worldwide; however, only the most economically viable projects will be built. East Africa has the potential to become a major LNG player, although there is limited infrastructure in place to move this gas to market. "This infrastructure will have to be built from scratch, under regulatory frameworks that have yet to be implemented," Franklin noted.

The proposed 60 projects represent 80 MMtpy of capacity, at a cost of approximately $20 billion per project, or more than quadruple the cost for LNG projects developed between 2001 and 2010. "With many projects being proposed ... project costs are unlikely to go down," Franklin said. New pricing solutions, such as Henry Hub linkage and short-term contracts, are feasible, but long-term contracts will still be needed to create a durable, stable, long-term LNG supply chain.