Hard times, hard decisions for LNG projects.

Author:Persily, Larry
Position::OIL & GAS

Larry Persily, assistant to the Kenai Peninsula Borough mayor, was invited to participate in a global LNG conference and prepared this report as part of the borough's ongoing efforts to share information about LNG market developments. The conference paid the travel expenses.

The frustrations of an oversupplied LNG (liquefied natural gas) market and low prices were evident as about one hundred LNG buyers, sellers, lenders, advisers, and goods and services suppliers gathered in London last month.

"How the hell do you plan your business in an environment like that," said David Ledesma, managing director of South-Court Ltd., a United Kingdom-based oil and gas consultancy. "How the hell are you going to go out and make final investment decisions?"

Spot-market prices for LNG cargoes delivered to Asia this fall are down two-thirds from the record $20 per million Btu in February 2014. Demand in China is not growing as much as was expected--just as new supplies are coming online from Australia and the United States--creating fears of an oversupplied market and low prices for several years.

Meanwhile, buyers are demanding shorter terms and more flexibility in their LNG supply contracts. Speakers at the fifth annual LNG Global Congress September 23 to 24 in London said the oversupply could play itself out by the 2020s, creating opportunities for new projects to meet demand, but those investment decisions are getting tougher on LNG project developers.

"Gone are the days when you can expect to get 15 percent return on your LNG plant," said Mike Fulwood, a principal in Nexant's global gas consulting practice.

Low Prices Will Help Build Demand

Conference speakers talked a lot about the price for LNG: It was way too high a couple of years ago. Now it is far too low. But the price needs to stay low enough to continue attracting new customers--which, the theory goes, would lead to increased demand and somewhat higher prices.

That means producers will need to hold down costs for new projects if they are to make money in the low-price world.

"The industry needs to find new ways to get lower costs," said Thierry Bros, senior European gas and LNG analyst for Paris-based banking and financial services company Societe Generale. "If you want to increase demand, you decrease prices."

Kazumi Takahata, deputy general manager at Tokyo Gas, had the same message: Keep the price down, and we'll buy more. In addition to lower prices, Japanese utilities are looking for a more diversified...

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