Five key takeaways from LNG 18

The LNG 18 Conference has come and gone.

If you haven’t the time to catch up on all the content from the presentations on the liquefied natural gas (LNG) sector, here are my key takeaways from the sessions.

One. Cautious optimism

Presenters at LNG 18 argued convincingly the demand for gas in the future was a very strong bet, aided by China’s desire to clean its air, COP21 commitments to reduce greenhouse gas, and the shortcomings of other fuel options. Sure, there’s a short-term challenge as lumpy new production meets a smooth growth curve, but that was to be expected.

New big greenfield projects are unlikely, at least not before 2020. But we will see a number of small floating storage and regasification vessels (FSRUs) purchased and moored up in harbours along the China coastline, opening up many second and third tier cities, and in more mass market countries like Pakistan, Bangladesh and India. So, a long-term bright future with short-term pain.

Two. The customer has spoken

Few sellers and buyers building and investing in large energy distribution systems are all tied together with long-term contracts. But at LNG 18, the strains of the industry’s business model were beginning to show. The customer base is demanding far more flexibility.

Customers need more flexibility from the suppliers in the form of shorter duration contracts, different pricing models, relaxation of shipping limits. There are signs the sellers are keen to retain customers by opening up contracts and adjusting some terms.

Three. The builders are sheepish

Construction productivity in the general infrastructure world has improved some 40% in the past five years, whereas in the oil and gas sector it has declined 20%. Costs clearly ran away on the recent round of projects, reinforcing the perception that gas is an elite fuel and halting demand growth, whereas the industry clearly needs gas to become much more mass market.

Boosting the level of collaboration and cooperation amongst the builders is now a significant clarion call. One senior LNG executive said egos need to be put aside, stop building monuments to themselves and get on with collaboration. Wow.

LNG 18

Four. Oil indexed pricing is fading fast

New pricing models are on the way. This is driven by the impending arrival of US LNG with its hub pricing construct, and by the eagerness of Singapore to put a hub in place. The conference concluded that the writing is on the wall for the end of the dominance of oil indexed pricing.

70% of LNG is bought and sold on long contracts that are oil indexed. So oil indexed contracts are not going away, unless buyers and sellers agree to open the contracts up and renegotiate. And they might. But aside from using hubs to help with price formation, there wasn’t too much discussion about the many other ways that price could be built.

Spot LNG and short-term markets are taking a greater share of the total amount of LNG transactions. Today the industry estimates 28% of all LNG is either sold on spot or on some short-term basis. This is rising to 45% over the next 10 years. There’s no reason to think spot LNG pricing will be oil indexed. Today spot prices are well below what an oil indexed price on a long contract would be.

Five. Technology is liberating supply and demand

Surprisingly few transformative technologies that should be coming to the LNG sector were on display at LNG 18; nothing on 3D printing, nanotechnology, revolutionary materials, or wearables.

What was on show were the supply chain inventions: the coming LNG vessels that will open up new stranded gas fields, the floating re-gas ships that will bring fuel to new markets, the bunkering vessels that will supply LNG for marine shipping, and the small scale LNG plants that will supply rail and trucking depots. These technologies promise to liberate new gas supplies, and unlock demand in the many smaller markets (ports, shipping, rail and trucking).

Japan and Korea, in particular, have profited from their need to import LNG by becoming very prominent in the heavy manufacturing of LNG kit: LNG cargo ships, production vessels for LNG and FLNG, the insulation for tanks and ship storage, piping and valves. The gas buyers have over the years linked their industrial and manufacturing policies to their energy import strategy.

It made me wonder how nations like Australia were going to extract as much or more value from their LNG industries in the same way the Asian importers do. It might not be through manufacturing, but surely the question to ask is how Australia’s domestic market regulations and policies are favouring the development of global leaders in key technologies and services.

What are the lessons from Australia’s great LNG construction boom? Register for a copy of the new Deloitte thought leadership on the Australian LNG sector.

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