CERAWeek ’15: Gas leaders see small-scale LNG gaining momentum

4/22/2015

By Adrienne Blume
Managing Editor

HOUSTON -- Wednesday was 'natural gas day' at the annual IHS CERAWeek conference. Daniel Yergin, Vice Chairman of IHS, chaired a late-morning plenary session on maintaining momentum in the global gas market.

Speakers included Andy Brown, Upstream International Director of Royal Dutch Shell; Charif Souki, Chairman and CEO of Cheniere Energy; Hirobumi Kawano, President of Japan Oil, Gas and Metals National Corp. (JOGMEC); and Volodymyr Demchyshyn, Minister of Energy and Coal Industry for Ukraine.

More energy, less CO₂. Brown, the first speaker to share remarks, stressed that more energy and less carbon dioxide (CO₂) emissions is not only a European goal, but also a global one.

How can the global gas and LNG markets address these issues? "We cannot allow the current pricing situation to distract us from the fact that global demand for energy is increasing," the Shell executive said. "The energy industry has a unique role to play in helping develop energy sources for the future."

The world has enough economically recoverable gas resources to last 200 years, Brown said. Natural gas is cost competitive, energy efficient and environmentally friendly. Although coal may be cheaper at the moment than gas, "…in the long term, it really isn't, when you consider the impacts on the environment, on health and on people," Brown said.

LNG demand growth and cost base. Shell predicts strong gas growth in the global energy mix, as evidenced by its recent acquisition of BG Group. The BG addition will allow Shell to grow its presence in natural gas and LNG.

Shell sees the global LNG market doubling to 450 MMtpy by 2025 as the number of importing countries jumps from just over 30 to more than 50 in the next decade. Of the new LNG supplies, 80% is expected to come from Australia, North America and East Africa.

Brown also noted that LNG prices must be adjusted. "The LNG industry in general needs to come to a much lower cost base," he said. "If you track the cost base over the last 10 years, you see that the industry costs are getting more expensive, not better."

The problematic cost base in the LNG market is due to several reasons: Companies are making LNG economics more complex than they should, risk attitudes are changing and EPC competencies are lacking.

"We need to get back to the basics," Brown asserted. "We need a more competent EPC community going forward."

Global gas markets expanding. In the US, Brown said, the power sector is witnessing economic and environmental benefits from greater gas production and use, as electricity prices in the US are half of those in Europe. Gas use for power dropped 25% in Europe between 2010 and 2013 in favor of cheaper coal.

In China, gas use is rising as the country works to curb its air pollution problems and lead the way in LNG-fueled transportation.

Meanwhile, the Middle East, a large holder of conventional gas resources, will account for approximately 25% of global gas demand growth over the next 20 years as power producers replace liquid fuels with gas, Brown said.

In Sub-Saharan Africa, access to energy is a challenge. Developing the region's gas is a large opportunity for resource-holding nations and international investors.

"In conclusion, demand for energy is rising, but this demand needs to be met while managing greenhouse gas emissions," Brown noted. Gas can help lower emissions, but carbon-pricing systems are also necessary to achieve emissions-reduction goals.

New US gas landscape unfolding. Cheniere's Souki shared his thoughts on LNG market development in North America and beyond. In the next few months, Cheniere will deliver the first LNG supplies from the Lower 48 states, from its Sabine Pass LNG export project in Louisiana.

Over the next five years, Cheniere will come to represent 10% of the global LNG market and be the largest purchaser of gas in the US, while investing more than $30 B in infrastructure development, Souki said.

The CEO does not expect many changes in terms of the gas supply and demand gas balance in the US over the next few years. At present, the gas supply in the US is dependent on oil prices, rather than gas prices; over 1,000 gas rigs were dropped over the past six months, he noted.

For the first time, Souki said, low oil prices are not allowing long-term gas projects to move forward, which is sparking talk among market players that it might be time to look at a different pricing mechanism.

The US is a large potential supplier, and it can adjust supplies at a very short notice to justify long-term project investment—which Souki called "a new development." Rigs can be taken off or put on quickly, if needed.

"We are living in a world of volatility," the CEO said. "We try to make investments that last 40 years, but the market is changing every two or three years."

Small-scale is the future. Due to this rapidly changing market scenario, "very, very large investments" are no longer needed, Souki said—although he quickly added, "even though Cheniere has done that."

The response, he said, is quick at the micro level. The future trend will be to put a micro-LNG system in place for approximately $1 B per 1 MMt of gas.

"This trend is acceptable to some investors; not all, but some," Souki noted. "It [small-scale gas processing] will change the way the gas market, and the world, will look in the future."

Shifts in Japanese gas market. Next, JOGMEC's Kawano shared an overview of Japan's gas aspiration. He acknowledged that the LNG share of Japan's energy mix will not be as high in 2030 as it is at present, due to nuclear plant restarts; however, LNG imports will continue to play a significant role, despite high prices. Supply source diversification and new pricing mechanisms are needed, Kawano asserted.

Japan is also working to develop its stranded methane hydrates, which represent 1.1 Tcm of gas reserves, or 10 years of energy imports for Japan. JOGMEC is conducting new production tests that are expected to offer valuable data by 2018. This data will pave the way for commercial production of methane hydrates in the future, Kawano said.

Ukraine 'ready and waiting' to transport gas. Ukraine's Demchyshyn next touted his country's infrastructure as a crucial component of the European energy market, although it is "massively underutilized," especially by Russian gas producers, he said.

Although the EU gas transport network appears to be well developed, shipments still regularly encounter bottlenecks. Ukraine is the most financially feasible route for the transit of Russian and Caspian natural gas to EU consumers, Demchyshyn said.

Ukrainian infrastructure is utilized for only one-third of Russia's gas exports, but the extra capacity is available to transport more supplies to Europe. For example, gas from Norway can be transported through Ukraine to Romania, Bulgaria, Turkey and potentially Greece, the minister noted.

Ukraine also has gas storage of 30 Bcm, which represents almost one-third of the EU's entire gas storage, and it has 1 Tcm of conventional gas reserves that can be utilized. Ukraine produces approximately 20 Bcmy of gas at present.

War's impact on gas market. Yergin asked Demchyshyn to discuss the impact of the war with Russia in eastern Ukraine on gas prices. "It is a very strange war," Demchyshyn said. "On one side, people are dying, and on the other side, big deals are being made" with Russia for energy shipments.

Demchyshyn noted that the war has not impacted gas transportation, as no major pipelines are located in the area of conflict or occupied by military forces.

Until the political clash is resolved, however, it will be difficult to talk economics, Demchyshyn said. Russia is sending gas through pipelines around Ukraine instead of through Ukraine, raising energy prices for end users.

"Russians, Ukrainians and Europeans need to sit down together. We need to stop playing politics and talk economics," Demchyshyn said.

IHS CERAWeek is taking place from April 20–24 in Houston, Texas.