Episode Transcript
[00:00:00] Speaker A: We're the largest exporter of LNG right now and we're going to continue to grow. I think we've got a huge surge projects between now and 2030 and we're going to probably be very dominant in the supply to Europe just because of logistics.
Welcome to the Next Imperative, a podcast hosted by A and M energy leaders tackling key issues and trends in the industry.
[00:00:27] Speaker B: Hello and welcome back to the Next Imperative. Today we're going to have a robust discussion on the LNG markets globally. Joining me are my A and M colleagues and LNG thought leaders, Renee Klimczak, John Corrigan, and joining from London, Roy Taya. Welcome, everyone.
[00:00:44] Speaker C: Thank you.
[00:00:46] Speaker B: Let's get the conversation started talking about global supply and demand with LNG today and kind of how we see it evolving over the next few years. Roy, would you like to start us off with a perspective on Europe?
[00:00:56] Speaker D: Yeah, sure. Thanks, Jeff.
Well, over the last few years, I think Europe has changed a bit the dynamic of the LNG trade flows.
After the Ukraine, Russia war, I think there was a big shift that has increased the interest in LNG across the continent. And we could see it in a shift in demand from pipeline gas into lng.
And this, this was materially resulting in a flurry of new capacity being built up across the continent, especially through floating units along the Atlantic and the Mediterranean over the next few years. I think that this, this picture is going to remain and continue and there will be a lot of interest in U.S. gas as well as Middle Eastern gas flowing into the region to fulfill the demand and also to replace the gas that was coming in from Russia in the past.
[00:01:58] Speaker B: Rene, what can you add?
[00:01:59] Speaker C: For many years, we've expected gas to be the bridge fuel for, through the transition, you know, the energy transition, because it has a lot lower emissions when it burns than obviously the crude. So we're seeing that play out. I believe when you look at the projections for the growth of LNG in the next decade, it almost doubles from where it is today, which is definitely double where it was a decade ago.
So I think that will continue. And the market, in terms of the markets, Europe will continue to be critical, as will Asia. And we probably will, to Roy's point, probably will see more growth in Europe due to the geopolitical situation. And again, it's no surprise that there's, you know, security concerns around the supply of gas that's been around for years. But I think what we've seen in the past few years is that actually come to fruition and so it won't be soon forgotten. And I think that LNG will continue to grow in demand in Europe for that reason.
[00:03:14] Speaker B: John, what are your thoughts?
[00:03:16] Speaker A: Well, I'd like to build on what Rene was saying in that, you know, demand is going to grow. LNG is going to support the energy transition. There's a lot of gas generation that needs to happen. And one of the markets that's really been a growth market is India, and they've got a lot of development to do and a lot of new generation to build, and natural gas is going to be the fuel of choice there. So I think, you know, when you look at India and China, it's really a question of gdp. Are they going to continue to grow? If they are, then yes, we'll have plenty of demand. Now, there will be some dislocations because these projects tend to come in waves and we may end up in a, you know, from time to time, either long or short. But overall, I think that we're going to grow into the LNG capacity everybody's looking at right now.
[00:04:13] Speaker B: Great, great.
Talk a little about globally. How is it all going to play coming into the US what's our role going to be as we look forward?
[00:04:24] Speaker A: I think it's a growing role. I mean. Well, I think everybody thinks it's a growing role and it is.
We've got a lot of new projects slated.
We're the largest exporter of LNG right now, and we're going to continue to grow. I think there's, you know, Qatar is the next biggest and they're continuing to grow. They've got some new projects coming online. But, but we've got a huge surge of projects between now and 2030, and we're going to probably be very dominant in the supply to Europe just because of logistics.
But that doesn't mean we can't use the Panama Canal to do some balancing over on the Pacific markets.
[00:05:08] Speaker B: Renee, your thoughts?
[00:05:09] Speaker C: Yeah, I think we also have an impact on pricing in terms of the, especially in terms of the supply cost of lng.
Prices are usually set by the markets they're going into or by crude oil just based on historic pricing patterns. But what the US brings to the LNG industry that's different from any other project globally is that the gas that's going into these plants is sourced from the US Gas supply. Right. And that is the US Gas market is the most liquid commodity market in the world.
So that brings a different dimension to the, to the input cost of the LNG relative to all the other projects that are largely sourced from a single field or a single resource of gas going into an LNG plant. So it's a much different dynamic and I think that dynamic the customers appreciate as well as the producers and the companies that are involved in the LNG production.
It gives you another pricing element to work with in your portfolio.
And even within the US it creates a lot of optionality around pricing and hedging and how to position yourself.
[00:06:38] Speaker B: So Roy, what's your perspective?
[00:06:40] Speaker D: I totally agree with what Rene has just mentioned. The US gas market has actually given optionality to players around the world in terms of gas supply. This takes me back about 10, 15 years where some clients in Asia were looking to invest in LNG terminal capacity just to break free from their 20, 30 year long pipeline gas contracts. Just looking to create some kind of arbitrage opportunity with Henry Hub and seeing if they can ship it for cheaper from the US and the way things have evolved over the last few years have actually played out in that direction. And I think the LNG revolution, the US becoming the largest exporter of LNG and has actually helped markets elsewhere become a bit more transparent and dynamic which eventually all the industrials and end users are finding quite interesting. And that plays down to their bottom line at the end of the day. So the US in short has played a long or a big, big role in making the market dynamic liquid transparent. And I think the US will continue playing that in the next few years.
[00:07:55] Speaker B: Ryan, and something you said triggered a thought in my head. There certainly have been some international companies coming to the US on the E and P side in recent years. I think in anticipation of exactly what your point you're making is that they bought large gas position, the Japanese particularly out of East Texas Haynesville and are really ready to load that onto the LNG trains once they get up and running.
[00:08:16] Speaker A: Yeah, right, exactly.
[00:08:19] Speaker B: What do we think about what's the perspective of the US oil and gas producer of all this?
[00:08:24] Speaker A: I think the US producers are eagerly awaiting the new capacity with the surge in oil production coming out of the Permian. Gas in the Permian is produced along with the oil. The economics are predominantly supported by the oil price. So we've got a glut of gas that's been trading at or below zero at times because of lack of infrastructure and lack of markets markets. So between the pipelines, the new pipeline capacity extending down to where the LNG plants are being built along the coast to other fields opening up, I think they're very, very happy that we're building LNG and that we're going, they would love to be able to extend their participation in the value chain in order to capture the delivered value. Because you know, even with the new pipeline capacity, the next bottleneck will be the liquefaction. And then, you know, it keeps going on and on until you get to the end market. So in any market where, you know, there's extraordinary length, you end up trying to move further downstream to get closer to the demand side.
[00:09:46] Speaker C: So we haven't really talked about the supply demand of gas in the US but clearly LNG is one demand source. The other sources are residential and industrial, which are traditional sources. But the other is all the data centers that we're adding in the US which consume tremendous amount of power. And that power is typically supplied by gas fired power plants.
The volumes that those are demanding is also part of the demand side.
So that kind of links back to the question around the supply in that Right now, as John pointed out, the supply of gas in the US is largely part of the liquid equation because the gas is produced with the liquid and the liquid has more value than the gas. So that's driving the production and there's plenty of gas.
At some stage we see the demand side requiring gas beyond what is actually being produced associated with the liquids. And when that happens, the gas price will change because it'll be based on what's that next marginal molecule of gas produced, what is, what is that market for that, what does it cost? And the cost of that is going to be higher than the associated gas, which John said sometimes has zero, you know, zero cost base.
That's a little bit of a complicated answer, but I guess the summary is right now the US enjoys low gas prices because of the demand changing from LNG demand and the data centers, at some point that price will increase substantially. And so, you know, understanding that dynamic will occur at some stage I think is an important factor and has a role to play in how we think about the pricing and the LNG export.
[00:11:59] Speaker B: Right. And I think that price is going to go up even if LNG never comes.
[00:12:02] Speaker C: Exactly.
[00:12:03] Speaker B: Because of the data centers, as you said.
[00:12:04] Speaker A: Yes, I like the way you put that because there's pricing of gas in the US but that because now you have a lot of LNG contracts indexed to Henry Hub, that's going to translate into prices elsewhere. And as we saw during the run up in LNG prices after the Ukrainian invasion, LNG demand is somewhat price sensitive. So we saw some markets take less gas.
And so if we get in a bind in the US and the price comes up, it'll be interesting to see what happens to that demand. I don't know. Roy, what do you think?
[00:12:45] Speaker D: Yeah, I think the price will be a bit more volatile in the next few years, especially on this side of the Atlantic. Again, it was typically linked to oil or longer term contracts.
It's going to be a bit more liquid now, so it will, there will be more spot trading and the prices are going to be more prone to market dynamics and sudden changes in supply and demand or geopolitical environments. And I do think though, despite this volatility, the spread or the arbitrage opportunity that players on this side of the world will have is going to decrease a bit in the future, which will make the markets a bit more efficient and a bit more tighter.
[00:13:34] Speaker B: Let's change gears here and talk about capital projects in the LNG space. There's a lot of pent up projects here in the US and with the administration change coming in January, the expectation is that those are going to free up and those are going to start to get built. What are you seeing Roy, internationally from.
[00:13:52] Speaker D: Our view here, I see a lot of interest in the capital projects that are lined up to come online in the US in particular. What I'm seeing here is investor interest From Middle Eastern NOCs in particular as well as larger end users like Tokyo Gas and other utilities a bit further away in Asia are looking to get their hands on assets in the US and to get closer to the molecules that they will end up consuming.
The change in regulation that is expected is going to increase that appetite in my view. And I think we will see a bit more investment coming into the US to accelerate the development of these capital projects.
In Europe, for example, the investment has been in floating units which was a bit faster than on ground terminals that typically were being developed contrary in the U.S. i think it's a bit more longer term perspective. There's a view that capacity will be there, there will be an outflow of gas from the US into other regions in the world and that's going to only help getting the cash in and developing these projects into 2030 and even beyond.
[00:15:13] Speaker B: Right. John, would you like to share?
[00:15:16] Speaker A: Yeah. So obviously in the US we have a lot of projects that have been on the they're ready for fid. We've got a couple under construction, we've got a few more about to go into construction.
So there is a tremendous amount of new capacity coming online.
I think it's around 50 metric tons per annum. So it's a huge Number that almost doubles our capacity between now and 2030. So that's going to be transformative. One of the challenges I see and that we've seen in the LNG markets for years is these projects, you know, they come in waves and we've got create shortages of steel, of labor and the next thing you know we've got project delays, project cost overruns. We've got. And just recently here in the US we had Zachary, who was building one of the facilities, file bankruptcy because of all the cost overruns. So I think the industry is going to have to do a better job of managing these projects, especially as you have concurrent projects going on in order to deliver these projects and not scare off some of the projects that haven't hit FID yet.
[00:16:35] Speaker B: So coming back around, if I'm a LNG market participant, what do I need to know? What do I need to be thinking about to plan out for the foreseeable future?
[00:16:45] Speaker A: Good question.
I think it depends on what kind of player you are. Right. So I think everybody in the natural gas value chain is a player in the LNG markets these days to some extent. Even domestic utilities have to keep their eye on the LNG markets because that's going to drive the price and availability of gas even in the U.S.
so you know, they've got a lot of power plants to build. They're going to be gas fired power plants because the data centers need the reliability.
So I think, you know, they've got a perspective of, you know, they need to watch and make sure there's going to be enough gas domestically.
We need to watch. I think the people developing these projects, to the extent we end up in a glut, whether it's short term or not, they need to look at where they are, where their competitive advantage is and where they are on that competitive scale. Can they make money at the interim, lower prices and how are they going to do that?
So I think that's something for them. And then on the demand side, Roy, I'll turn that over to you because you're sitting in the demand center, I'm sitting in the supply center.
[00:17:58] Speaker D: Yeah, no, I totally agree. Everyone across the value chain is an LNG player.
You know, we go from the big trading houses to the super majors like Shell and Total Investing and becoming global players as well as, you know, Qatar being one of the largest exporters into Asia. But then you can look a bit down the value chain and you see a small break. Bulk or LNG bunkering business looking to buy LNG vessels and trade and try to benefit from the arbitrage between us, Europe and Asia. And then you go further down to the utilities who are trying to build trading capabilities just so that they can source LNG and just monitor the market a bit better. And then you go to the likes of Tokyo guys that we mentioned before that is investing in actual upstream capacity just so that they can secure the supply. And then now they are looking to actually wind down their portfolio. So everyone is becoming an LNG trader or LNG player. And the market liberalization that we've been seeing again starting out of the US Shale revolution is helping that happen. And I think it's, it's quite an amazing transformation that the market has seen over the last few years. And definitely LNG is going to be the fuel that's going to get us through the energy transition as different countries reduce their dependence on coal and other dirty, dirty fuels that they have.
[00:19:35] Speaker B: Renee, what are your thoughts?
[00:19:36] Speaker C: Building on what John and Rory said, if you look at the global market and you talk about the LNG players, those are going to be the, in some cases the end users, the customer, in some cases the trading houses, in some cases, you know, the shippers are, you know, the large oil and gas companies like the Shell and Chevron, Exxon.
What I've seen most successful, and I think we're seeing continue to play out, is the building of an LNG portfolio at a global basis, regardless of whether you're in any of those categories. What that means is you have different options for supply sources. You have a multiple array of customers. You also leverage the spot market for LNG to really arbitrage and make the most out of the portfolio that you have. It gives you option, gives you optionality of where to ship a cargo from the US Or Asia. Sometimes, believe it or not, it makes more sense to ship a cargo of LNG that ship from Australia to Europe rather than Asia. And being able to have the flexibility in your shipping and the contracts, the way you've contracted on both sides allows these players to do that. Within the US there's kind of a different dynamic again because optionality means for these players having access to multiple LNG plants within the US the reason being sometimes gas prices are different to each of those, but also sometimes we have hurricanes and other things that cause a disruption in the gas supply. So having that optionality where you have access to several LNG plants at different locations provides that type of security.
It also gives you a little better access to, you know, different prices. The other piece is to have optionality in terms of how you priced the purchase of the gas within the U.S. so, you know, John mentioned that some producers now are looking at netback, lng, Netback. That's. That's one way. Obviously, we have the gas pricing, US Gas pricing by Basin, which. And the spot market, which has existed for many years. There's also, you know, financial derivatives, the hedges and things like that. So really stepping back and being very strategic about how you structure your purchases, your pricing, to give you that optionality and flexibility, I think, are some of the keys. And we're seeing that play out as well.
[00:22:33] Speaker B: Yeah. One of the things that stuck in my head is Expand Energy's recent announcements, how they're adding a huge marketing and trading team that I typically think of with super majors, not US independents. And clearly they're thinking ahead and seeing changes in looking to benefit from it.
[00:22:49] Speaker A: Well, as these independents in the US get so big right now, they're producing huge volumes of gas and they've got to find a way to monetize that efficiently and effectively. So they're going to need that. To Rene's point.
[00:23:05] Speaker B: So beyond what XPAN is doing with marketing and trading, what are other things you see that are opportunities or changes coming?
[00:23:11] Speaker A: Well, I think is there's a lot of relief in the Permian that they're getting new capacity to the Gulf Coast.
You know, if you're up in the Marcellus, you've got the ability to move south. The problem is you've got to get that last mile and you've got a massive amount of gas in a very small geographic area. And there is not enough pipeline capacity to move across the different pipeline systems necessarily. So we've seen a couple of strategies around that. One is some of the LNG facilities being built are including a pipeline that will create a spine for other pipelines to connect to.
Another thing we're seeing is the midstream or pipeline companies themselves building new laterals to move from market to market to expand that capacity. Because when you think of it, right now the U.S. out of the Gulf coast is moving about 10 or 12 BCF a day, which, you know, if we were talking five years ago, that was the entire demand for the Northeast United States.
So that is a lot of gas in a small area. And you've got to move that through a network of pipes because even if it's six feet away, if it's not connected, it's not coming in. So there's gotta be a lot of pipes built. And, you know, that's one thing you mentioned the the administration, incoming administration and regulation is, you know, it's been difficult to build pipelines and maybe the new administration will facilitate that and that will help support this new expansion of LNG capacity.
[00:24:52] Speaker B: Renee, John and Roy, thank you for joining us. Thanks for the very robust discussion on LNG to our audience. Thank you for watching. We hope you enjoyed this episode and we look forward to seeing you on a future one.
Thank you.
[00:25:07] Speaker A: Thank you for listening. Make sure to subscribe to the next.
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