(The opinions expressed here are those of the author, a columnist for Reuters.)
By Clyde Russell
BARCELONA, Sept 19 (Reuters) – Bullish, as a word, doesn’t quite capture the stampede of optimism that was gushing out from the natural gas industry at its biggest annual event this week in Barcelona.
“The demand is there,” stated Saad Sherida Al-Kaabi, the chief executive of Qatar Petroleum, the world’s largest producer of liquefied natural gas (LNG), in confirming that his country was on track to lift its output to 100 million tonnes of the super-chilled fuel by 2023.
Al-Kaabi’s remarks were among the more measured at the GasTech conference, with some executives making predictions that the market for LNG, currently around 300 million tonnes a year, will more than double by 2025.
Speaker after speaker on the top-level panels offered up various versions of the view that natural gas is no longer merely a transition fuel from dirtier and coal and crude oil to renewables, but is now a major part of world’s energy mix for the long term.
But in stark contrast to the swathes of optimism, there was very little talk of when the next round of major LNG projects will reach the stage of final investment decisions (FID).
If the denizens of the natural gas industry truly believe in the forecasts of rapid and strong growth in LNG demand, led by emerging buyers in Asia and China’s ongoing embrace of the cleaner-burning fuel, it would be logical to expect a new round of project approvals.
Instead, progress toward FIDs for many of the planned projects around the world appears glacial.
The exception to this slow process are those developers who have access to capital and can take higher investment risks than more cautious energy companies, who have to satisfy not only a board of directors, but also bankers and shareholders.
Qatar’s planned additional 23 million tonnes of LNG capacity is a case in point.
The small Middle Eastern country has the capital to underpin such a decision, and its low-cost structure means it can still prosper even if the extra capacity turns out to be surplus to market needs, thereby lowering prices.
Another exception appears to be Russia’s Novatek, the developer of the Yamal LNG facility.
Novatek Chairman Leonid Mikhelson told a media briefing at GasTech that the company’s planned Arctic-2 project would add 20 million tonnes of LNG, taking his company’s total output to about 37.5 million tonnes by 2025.
Mikhelson expressed confidence that the funding for the new venture would be secured, and also that there was no doubt in his mind that Asia would soak up the additional LNG.
While Mikhelson may well be correct, and is prepared to invest to back his vision, Western oil companies may find it harder to get the necessary approvals.
PROJECTS GALORE, APPROVALS SCARCE
There is no shortage of LNG projects around the world, with several planned in Canada, the United States, east Africa and Australia.
But the scars from the last round of major LNG developments perhaps haven’t quite healed, and are fresh in the memories of many would-be developers.
Over the past decade Australia has built eight new LNG projects, at a cost of more than $200 billion, and will at least temporarily overtake Qatar as the world’s top producer when the last two come online later this year, or early in 2019.
However, many of the projects ran over budget and were delayed, and the surge of supply caused spot LNG prices to at one stage fall to around a quarter of the record levels reached in 2011.
The other major contributor to LNG supply has been the United States, which now has two operating LNG export facilities, and four more under construction and likely to be producing by 2020.
But, if the demand forecasts for annual LNG trade to rise from the current 300 million tonnes per annum to something closer to 450 million tonnes, or even more, by 2025 are accurate, then there isn’t enough new LNG being developed.
In theory, this should spark a new round of FIDs, but the LNG world has been changing at a rapid pace and the traditional methods of developing large projects appear unlikely to work this time.
The traditional way of developing a multi-billion dollar plant was to underpin the financing by contracting long-term sales, most often linked to the price of crude oil.
But LNG buyers no longer want these kind of deals, and are embracing the model of shorter-term agreement and spot purchases from a variety of suppliers.
It would take a brave, or reckless, board of directors to sign off on project of up to $25 billion on the hope that if we build it, they will buy it.
Bankers are also unlikely to be impressed with that sort of justification for a new venture.
Projects in the United States now face the additional hurdle and uncertainty being created by President Donald Trump’s escalating trade dispute with China, with LNG now included in Beijing’s retaliatory tariffs.
The trade war may turn out to be a relatively short-lived affair. But, while it remains resolved it may well give pause to any planned FIDs in the United States.
Overall, companies are going to have find new ways of underwriting project developments, or risk losing out to those developers that can afford to take the risks.
Editing by Christian Schmollinger