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Tokyo Gastech: Changed/New Views On Timing Of LNG Correction, Impact Of FSRUs, and LNG For Fueling Ships

By Dan Tsubouchi

There was information overload at the big Gastech natural gas and LNG conference in Tokyo this week. So no surprise, the initial reporting has been on the well known themes – current LNG oversupply and its impact on LNG prices and need for lowest cost liquefaction. But as always happens, once analysts get back to their offices, they then look for what has changed or emerged in the last year.  Three of these changed/new themes are more calling for the LNG oversupply to be corrected sooner than expected, increasing impact of FSRUs in 2017, 2018 and 2019, and acceleration of the needed LNG fuel infrastructure for LNG to fuel tankers and ships.

Gastech is being held in Tokyo this week, and it is likely the leading conference and exhibition for “advancing the role for gas & LNG in the global energy mix”.  The expectation was for ~25,000 to attend including the who’s who of global natural gas and LNG.  And as always  happens, whenever there is a major conference of leaders – there are announcements, sideline comments from ceos and experts, and energy groups releasing thematic reports.  Plus when you have a world leading conference, there is also business TV live coverage. This is exactly what happened this week.

Its tough for greenfield LNG projects anywhere (not just Canada) and liquefaction costs have to go lower.  One of the best panel discussions for LNG insights was the “International Energy Leadership Panel Debate “How are Gas Suppliers Adapting to the Changing Global Market?” featuring Chevron, ConocoPhillips, ExxonMobil, Qatar, Total and Woodside. Fortunately the Bloomberg terminal had a live feed of comments from the panel discussion.  The common theme from the panel was the challenge today to move a greenfield LNG project to FID.   Bloomberg noted that “Basically every panelist said that the most important task for the LNG industry is to lower the cost of drilling and building liquefaction plants so they can offer cheaper prices to buyers and still be profitable”.  Under current LNG price expectations, the panel sees LNG projects getting approved in the order or brownfield, expansion using existing infrastructure and lastly greenfield.  The recent Chevron/Exxon analyst days (see our March 12, 2017 Energy Tidbits) brought home the theme of need to be low cost, and need to compete against GoM LNG. Bloomberg TV interviewed Hoegh CEO Sveinung Stohle at Gastech [LINK], who said simply described the challenge for LNG liquefaction projects “gas today costs half of what it did two years ago.  so for new projects, that is going to be a challenge as new projects at the moment are too costly”.  It makes it tough to see how greenfield LNG projects, not just in BC, get approved in 2017 and 2018.  The other challenge for greenfield projects is timing – they have to get going as there are more brownfield projects coming forward.  A new LNG development this week was Qatar saying it was lifting its 12 year ban on new drilling in its North Field, will open up development in the southern section of the field and expects to add 2 bcf/d in 5 to 7 years.    COP described the challenge for greenfield LNG FID simply – “higher LNG prices are needed”.

LNG buyers are taking advantage of current oversupply to negotiate more spot LNG price deals.  This week, Bloomberg and others reported on JERA’s (the joint venture between Tokyo Electric Power TEPCO and Chubu Electric Power) deal with Total on 6 LNG cargos that will see 2 of the cargos linked to Asian LNG prices. JERA also reportedly has the option to switch the LNG spot cargos to oil linked pricing.   It isn’t clear if this is a “new” contract.  But Total is indicating that it is an existing relationship, its just not clear if it’s an existing contract. Bloomberg wrote “it also shows that Total is “providing enough flexibility and expanding its existing relationship with JERA, the largest LNG player in Japan.”  This is not the only push by LNG buyers for better pricing.  Last week, JERA announced [LINK] its MOU with KOGAS (Korea Gas Corporation) and CNOOC to cooperate on LNG including “joint procurement of LNG”.  This MOU was almost 1 year in the making.  LNG buyers have been focused on looking for better terms, especially following the Petronet (India) [LINK]  renegotiated downward long term take or pay LNG contract with RasGas (Qatar) a year ago.  We aren’t surprised by the LNG buyer push to get as much price negotiations done now in the current oversupply before LNG turns to undersupply, and believe it is supportive of our view for higher than strip 2019 to 2022 HH prices.

Increasing impact of FSRUs on global LNG demand and fixing the current LNG oversupply. The FSRUs are no question emerging as a key theme to move LNG from oversupply to undersupply sooner than expected.  Our long stated view is FSRUs are a game changer to LNG markets and will be the factor that tips the oversupply to undersupply 2 to 3 years earlier than expected.  FSRUs have moved from under the radar to a focus in the last six months.  The best comment came from the Woodside prepared remarks, where Woodside noted that FSRUs “have already grown from 10Mtpa in 2012 to almost 30Mtpa in 2016 amid new demand from countries including Indonesia, Pakistan, Egypt, Argentina, Brazil and Jordan”.   30 Mtpa is 3.95 bcf/d.  FSRUs have only started to escalate in the last 2 years and are continuing to grow.  The April 2, 2017 Energy Tidbits noted that new countries with FSRUs added 1.95 bcf/d (so half of the total) in 2015 and 2016 alone.   The other interesting comment from Woodside was “And that’s set to grow further. Bangladesh, India, the Philippines, Sri Lanka and Vietnam are also considering deploying FSRUs.  Emerging markets now account for 5% of global LNG demand and that’s expected to rise to 27% by 2025”.   That means that FSRUs and emerging market will add 17 bcf/d by 2025.  It sounds big, but it is only 2.5 bcf/d.  or the equivalent of 4 or 5 new FSRUs send out capacity per year.  The International Group of Liquefied Natural Gas Importers (GIIGNL) issued its “The LNG Industry: GIIGNL Annual Report 2017” ahead of Tokyo Gastech [LINK].  GIIGNL notes “The orderbook comprised of 9 FSRUs. 6 of these vessels were scheduled for 2017 delivery”.   If we assume a typical send our capacity of 0.5 to 0.6 bcf/d, these 6 FSRUs would have the sendout capacity of 3 to 3.6 bcf/d.

New developments should see increasing LNG fuel for ships post Jan 1, 2020 low sulphur rules. There was something new at Tokyo Gastech!  Its new that there is significant progress to put the needed infrastructure (LNG refueling bunkers and LNG powered tankers) in place to support conversions of existing tanker/ship fleet and/or increasing new build tanker/ships. This is an important development – without LNG refueling logistics, LNG fueled ships and tankers won’t grow.  This will allow LNG to capture more of the marine fuel market when the new low sulphur maritime fuel standards start on Jan 1, 2020.  Woodside was particularly bullish on this saying “We anticipate the next wave of demand growth will come from the use of LNG as a transport fuel, in ships and on road and rail.  The International Maritime Organisation’s announcement of new caps on sulphur content in shipping fuel from 2020 has added momentum to this switch to LNG as a transport fuel. If all the ships in the world converted to lower-emission LNG, that market alone could account for 200Mtpa.  At Woodside, we are switching to LNG-fuelling of our own supply vessels and investing in infrastructure to provide LNG as a fuel to other industries and exporters.  Japan is also preparing for this change, with plans to launch ship-to-ship bunkering in 2020 and develop the Port of Yokohama as a regional LNG bunkering hub”.  Capturing all of the ships high sulphur fuel demand is not realistic, but capturing a portion really isn’t in mid term natural gas demand forecasts, and will add to post 2019 natural gas demand and more support to our call for better than strip HH prices for 2019 to 2023.  Capturing 10% of the is market or 20Mtpa would add 2.6 bcf/d to LNG demand.  Due to the length of this blog, we will do a more detailed followed up on LNG for fueling ships.

A change in tone, a few more LNG players step out saying the LNG oversupply will be corrected sooner than expected.  We recognize that the LNG producers are talking their own book, but its nice to finally see more talk about the LNG oversupply being corrected sooner than expected.  This is a change in tone from last year where the oversupply correction was being pushed out.  In 2016, the expectation for correcting the LNG oversupply was pushed back to 2023 to 2025.  Our view continues to be that FSRUs are the game changer to mid term natural gas prices and will lead to the LNG oversupply being corrected 2 to 3 years sooner than expected ie. closer to 2020.  Bloomberg noted “Qatar’s energy minister, Mohammed Al Sada said in February that almost all the country’s domestic LNG terminals have been paid for. And despite a near-term glut, he said the commodity will be in short supply by 2021”.  Woodside didn’t give a date but raised the question “LNG market tightening sooner than expected?”, saying “But we need to look over the crest of the hill and it is clear a supply shortage looms, unless investment decisions are taken soon”, but then noting how the current conditions are not favourable for greenfield LNG FID.

Once Tokyo Gastech is digested, look for more on the “new” themes of faster oversupply correction, importance of FSRUs and increasing potential for LNG to fuel ships.  There is information overload at big conferences like Tokyo Gastech. So the headlines tend to be on  today’s known issues ie. the current LNG oversupply, LNG buyers pricing pushes, and challenge for greenfield LNG FIDs.  But what always happens post overload, analysts will look for new or changed themes from last year such as more seeing LNG oversupply corrected sooner than expected, FSRUs are already having a large impact and still growing, and that the LNG fuel infrastructure is being put in place for LNG to capture more marine fuel market share post the new low sulphur rules on Jan 1, 2020.   It may not be immediate, but you can see the tone on 2019 and beyond on natural gas prices changing, and when that happens, we should see the back end of HH strips move up.  The long term shape of the strips is an important indicator for investor tone to natural gas.