dmg events #LNGAmericas 2–4 November 2021

World LNG & Gas Series: America Summit – Executive Summary 2016

The global LNG market is in a state of major transition. From over 44 speakers and panelist present at the 2016 Summit, Chairwoman, Pat Roberts, has drawn together the key findings with respect to market fundamentals and their consequences, and most importantly identifies emerging opportunities to build new LNG demands.

Fill out the form below to access the 2016 Executive Summary:

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Interview with Esteban Papanicolau, LNG Advisor, Energía del Pacífico

1. How are buyers managing risk reward in the current climate?
Our understanding is that we are facing a transition in risk allocation in the LNG world, with a “case by case” approach and no off the shelf solutions that apply across the board. We need to differentiate new buyers, or buyers from new facilities that need to be financed and built from buyers from existing LNG import terminals. The LNG industry needs new buyers, and most of the new buyers need differentiated logistics, financial solutions and tailor made LNG supply contracts and this is the focus of GasPorto International, that is, to encourage new entrants to the LNG market. The current window of opportunity of abundant LNG should be the biggest trigger for new LNG import terminals, as well as for older contracts re-negotiations.

2. How is the current oil market, and in turn the LNG price, impacting gas demand in South America?
Each country in Latin America has its reasons and its strategy to buy LNG the way they do it. LNG has been a transition fuel in Argentina and Brazil where abundant reserves of natural gas have been discovered but will take some time to reach the market. Chile turned to LNG when Argentina suddenly stopped delivering natural gas through its several interconnection pipelines. Those countries buying LNG in the spot market are doing better this year than previous times. However, the lower price has not triggered higher demand.

3. How can the industry make sure gas is competitive compared to coal, oil and renewables?
Our vision from GasPorto is to transition to an “eco-thermal” power generation matrix, with natural gas and renewables offering base power to the system. Brazil is moving in that direction allowing more firm off¬-take from new power plants running on natural gas. This firm off¬-take allows for competitive long term LNG supply contracts. Coal and Oil based power generation is tougher to finance, though there is space for merchant plants running on cheaper fuels like coal. However, environmental licensing is a real challenge for the dirtier fuels.

4. What LNG pricing formulae are needed for Latin America buyers to stimulate demand?
For the specific case of LNG displacing liquid fuels, the trend is towards Brent indexed contracts. This does not mean that HH linked contracts are not viable in Latin America.

Ryan Schleicher, Director, Commercial, Jordan Cove LNG

1. What changes are being made to keep new liquefaction projects competitive?

In the short term, competition among contractors is one of the biggest factors in reducing costs but we know that won’t last forever. Long term, Modularization is lowering construction costs and that could lead to a real shift in the cost curve. If you look at the most cost competitive of the next wave of LNG, most of them are in the US and they are using modularized construction and smaller liquefaction trains. Also, we are starting to see more competition amongst liquefaction technologies which could keep downward pressure on costs for some time. When prices were high, buyers and sellers preferred to stick to what they know, but low prices lead to innovation and that’s why less-prevalent technologies are starting to gain market share.

2. Will shorter term contracts become the norm?

Yes and no. I believe that long-term contracts that expire over the next 10 years will probably be replaced with spot or mid-term contracts. Experienced LNG buyers know that new supply projects don’t get built without long-term contracts to support them. I think that savvy LNG buyers are going to ration the long-term portion of their portfolio for greenfield supply contracts, while they sign shorter term contracts with portfolio players and legacy supply projects under renewal. At the same time, the global LNG market is growing, which means there are a lot of new market participants and many of these new LNG buyers are in very price sensitive markets. They may be lured by shorter-term contracts at lower prices (and we have seen that trend in recent deals), but you have to think this is a bit of a trick by the big LNG suppliers out there. I don’t think you see such low-prices offered on long-term supply contracts today and when those low-priced short-term contracts roll-off, we may be in a very different market where buyers no longer have leverage. So it’s a risky game that should be managed with a portfolio of supply contracts: spot, short-term and long-term.

Peter Abdo, Managing Director, Head of LNG, Origination & Structure – EMEA, Bank of America Merill Lynch

Patrick Janssens, Vice President, Global Gas Solutions, ABS

1. Regarding FSRUs, how much potential is out there in terms of unlocking new demand and where will this demand come from?

The LNG supply is growing fast. Australian projects are coming onstream, and the US Gulf of Mexico – which has the
ambition of becoming one of the main LNG exporters worldwide – exported its first LNG earlier in 2016. Many of the
traditional LNG otake markets (such as Japan, Korea, Europe) show little growth potential in the immediate term,
but other growing economies, which by virtue of their growth see a quick rise in energy needs, could employ FSRUs,
a solution that is demonstrating it can provide a fast and cost-eective solution to serve these markets. Hardly a week
goes by without a new FSRU opportunity being announced.
2. Will FSRUs continue to be cost-effective enablers to open new markets?

FSRUs offer multiple advantages. The units can be fairly standardized and built in specialized shipyards, which offers
clear cost benefits. FSRUs generally are oered to the market on leasing terms, allowing projects to be developed
with very limited cash up front for LNG importers. Several FSRU projects have demonstrated they can offer access to
new market very quickly; in many cases, new LNG import facilities have become operational in less than 12 months,
and some have reached that point in even less than six months. FSRUs can provide significant flexibility, serving
growing markets and seasonal markets and can even be deployed as a temporary solution while permanent
land-based facilities are being constructed.
Major oil companies now also see FSRUs as market openers for LNG. When large LNG exporters fully support this
business line along with the shipping and FSRU community, the sector will be strengthened significantly.
3. How do you see the shipping industry evolving and innovating in this new era of oversupply?

Currently, there is an oversupply of LNG ships, but there also is huge potential for new LNG coming onto the market
in the medium term. At present ship owners are looking at alternative markets for both unfixed old and new tonnage.
Recently, one of the most modern LNG carriers with the newest slow speed dual fuel engines was fixed for a long-term contract as an FSU. Many owners are looking at opportunities for converting vessels to FSUs or FSRUs. In the longer run, this also helps unlocking the new LNG markets.

Octávio Simões, President, Sempra LNG

1. How is the requirement of buyers to seek out shorter term contracts affecting project financing?

Given the size of the capital requirements to launch a liquefaction project, short-term contracts do not support the
development of new supply. The size of the commitment can be mitigated by establishing contracts for the
infrastructure only, such as in the US projects, but not the commodity, what we typically designate as the cost-plus
model. This allows new supply to be developed on a timely basis and avoid the “Buyer’s market – Seller’s market”
2. How eectively are gas and LNG competing for their rightful place alongside coal and renewables?

The simple answer is that in my opinion gas is not competing eectively. The flexibility of gas generation to support
the renewables development and the environmental advantages of gas versus coal and oil are not being deployed
successfully. Part of the problem has to do with the recent high prices of LNG as the linkage to oil caused the cost to
skyrocket when went up in price. Another element of the failure has to do with a lack of industry advocacy and
coordination to assign real carbon costs to the fossil fuels being considered.

Jason Feer, Head of Business Intelligence, Poten & Partners

1. How do you see small-scale developing as a means to unlock new demand in emerging markets?

Small scale has the potential to be a significant source of new demand in coming years. Applications such as bunkering, motor fuels and small scale generation all have the potential to increase demand for LNG. That said, it will take some time before these new applications combine to boost overall demand substantially.
2. How competitive is LNG in the fuel mix and will we see an increase in the use of LNG to Power in the coming years?

At current prices, LNG is highly competitive. Not only does it displace coal fired capacity in some markets, such as
Europe, but it also is attractive to markets considering small-scale projects and FSRUs. However, in the longer run,
LNG prices are likely to rise as the current surplus is absorbed so there is a risk that LNG will become less competitive
over time.

3. What role do you see gas having in the next 5-10 years and what will be the relationship between gas and renewables?

Gas should have significant role in the global energy mix in coming years. As both liquefaction capacity and regas
capacity grow, LNG will find new markets. LNG and natural gas also have a role to play in reducing carbon emissions,
particularly in markets where gas can displace coal in generation.
With regard to renewables, gas both complements and competes with renewables. Once renewable capacity is built,
it tends to run whenever the conditions are right, and that can displace natural gas generation.

Peter Abdo, Managing Director, Head of LNG, Origination & Structuring – EMEA, Bank of America Merrill Lynch

1. How are Seller’s business strategies evolving in the current period of oversupply?

Undoubtedly, the traditional model is being disrupted. Sellers are being challenged to differentiate themselves in terms of offering flexibility, credit and pricing options for new projects and emerging buyers. There are multiple ways of doing this and it just requires a new approach. In a well-supplied market, there is a tendency for sellers to compete aggressively on price even at the cost of a risk-adjusted negative return. This is not sustainable because ultimately market, operational and credit risk factors need to be accounted for. It is for this reason that sellers in this environment need to figure out ways to compete more than on just price.

2. What do you foresee to be main challenges in LNG project financing between now and 2020?

Changing buying patterns from both traditional as well as emerging buyers are proving to be a challenge to underpin projects these days. Projects historically achieved financing due to reliable 20-year contracts backed by buyers with sound financials and strong positions in their local downstream markets. This has changed as buyers are looking for shorter term, more flexibility (volume and destination), and reduced volumes.

3. How do you see the trading market developing over the next five years?

At Bank of America Merrill Lynch we see a trading market developing over the next five years, not unlike what we’ve seen in coal and oil. But the market will need further standardisation and greater market participation. Given the near-term outlook on flexible supply, trading should definitely increase.

4. What do you think will be the most effective enabler(s) to support the growth of the gas and LNG industry?

Technology is definitely playing its part. Witness the new buyers who have come to the market in the past 24 months as a result of FSRU’s. The next step is now for the industry to figure a way to unlock the potential demand from the transport and power conversion sectors.

David Chung

Ed Cox

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