Analysis continues of U.S.-China deal to encourage LNG trade

(Bloomberg; May 21) - After an executive from U.S. liquefied natural gas exporter Cheniere Energy spoke at a conference in Beijing last week, the first audience question was an invitation to visit one of China’s biggest LNG buyers, state-owned Sinopec. The exchange highlighted a budding relationship between U.S. sellers and Chinese buyers after an agreement struck this month by the Trump administration and President Xi Jinping’s government welcomed China’s investments and purchases of U.S. gas.

“The trade deal paves the way for Chinese support into U.S. LNG in both existing and potential future projects,” said Kerry Anne Shanks, a Singapore-based analyst at Wood Mackenzie. While the trade deal announced May 11 doesn’t appear to fundamentally alter access by Chinese companies to U.S. LNG, it welcomes China to receive shipments and engage in long-term contracts. That may help ease concerns in China that involvement in the LNG industry would be met with U.S. government wariness.

“There’s never been anything formally that said there are restrictions on Chinese buyers,” Shanks said. “But there’s always been that fear.” U.S. supplies accounted for almost 7 percent of China’s LNG imports in March, customs data show. But these cargoes were supplied through intermediaries or spot deals, since China currently has no long-term contracts to directly buy U.S. gas. Longer supply contracts, which can run more than 20 years, traditionally help underpin financing for export projects by providing lenders with confidence the developments will have stable customers.

Read more: Oil and gas news briefs May 25, 2017

China could use U.S. LNG to squeeze better prices from Qatar

(CNBC; May 19) – A deal to encourage China’s purchase of more U.S. liquefied natural gas could break Qatar's grip on LNG pricing — even if no additional U.S. supplies ever reach the Asian powerhouse. Last week, the U.S. Commerce Department said it had reached an agreement with Chinese authorities that would see Beijing give state-owned and private companies a green light to negotiate long-term deals with U.S. exporters. The mere prospect of China buying more U.S. LNG could upend the global market.

It would give the world's biggest buyers — Japan, South Korea and China — more leverage in negotiations with top supplier Qatar and other big players. That could in turn shift prices paid for LNG across the world. In Asian markets, most LNG is sold under long-term contracts, with prices indexed to oil. Those contracts can be renegotiated, and the deal between Beijing and Washington could loom large in future negotiations, said Benjamin Salisbury, senior energy policy analyst at FBR Capital Markets.

Chinese companies "don't have to import any U.S. LNG,” he said, “they just have to have that sledgehammer in their pocket when they go to negotiate their other contracts." Salisbury believes Beijing's real goal is to break Qatar’s monopoly over setting Asian LNG prices. To be sure, Qatar has already seen that monopoly erode, said Massimo Di-Odoardo, head of global gas and LNG research at energy research firm Wood Mackenzie. The Qataris have been forced to renegotiate some contracts in light of the global oversupply, falling Asian LNG prices and new competition.

Read more: Oil and gas news briefs May 22, 2017

Chinese official sees increase in U.S. LNG imports after 2025

(Interfax Global Energy; May 17) – China’s LNG importers have played down expectations of a surge in cargoes from the United States in the near term, following last week’s deal to promote liquefied natural gas as a cornerstone of trade between the world’s biggest economies. “My feeling is [imports will increase] after 2025,” Chen Bo, president of Unipec, the trading arm of state-owned Sinopec, told Interfax Natural Gas Daily on May 17 at the China LNG & Gas International Summit in Beijing.

The earliest Chinese companies will consider buying long-term LNG supplies from U.S. exporters is likely to be 2022, Chen said. A source at a state Chinese LNG importer told Interfax Natural Gas Daily that large volumes of U.S. LNG would not arrive until near the end of the next decade as China is already importing more than it needs. Unipec resold more than 2 million tonnes of LNG last year and expects to sell more of its surplus contracted volumes this year, the company president said.

Chinese oil and gas majors, including Sinopec, have been forced to resell contract LNG volumes or renegotiate deals due to strong competition from cheaper, abundant spot-market supplies. But the Unipec executive was more upbeat with his long-term outlook. He said China’s rising LNG demand will be met mainly by Australia, Qatar and the U.S.

Read more: Oil and gas news briefs May 18, 2017

U.S.-China trade deal may not do much to help LNG, analysts say

(CNBC; May 12) - Gas producers and liquefied natural gas exporters may see limited benefits from the U.S. deal with Beijing to open Chinese markets to U.S. gas, analysts said. The deal, announced by the Commerce Department on May 11 as part of a plan to boost U.S. exports to China, makes it easier for Chinese companies to negotiate long-term contracts to buy LNG from U.S. suppliers. Beijing will allow private and state-controlled companies to import U.S. gas and will encourage them to invest in import facilities, a source told The Wall Street Journal.

China is the world's fastest-growing market for LNG, according to energy research firm Wood Mackenzie. The deal positions the United States to capture part of that growth, said Massimo Di-Odoardo, head of global gas and LNG research at Wood Mackenzie, but he cautioned that U.S. LNG's fortunes in China "will depend on its competitiveness versus other global alternatives and Chinese buyer appetite for exposure to U.S. gas prices." The deal does not change China’s status as a non-free-trade nation with the U.S., which requires Energy Department approval for LNG exports to the country.

Alan Bannister, regional director for energy pricing at S&P Global Platts, said shipping LNG to China from the U.S. Gulf Coast — where much of the export capacity is being built — would be inefficient and unlikely. "China is much nearer and much cheaper to ship from Australia, for example, or Qatar," he said. "What I think we're more likely to see in the real world is that U.S. Gulf Coast LNG will primarily go to Europe." China imported 26.1 million tons of LNG in 2016, up 32.6 percent on year. Australia supplied 46 percent of the gas; Qatar delivered 19 percent; the U.S. supplied about 1 percent.

Read more: Oil and gas news briefs May 15, 2017

LNG industry could learn from lack of collaboration in Australia

(Bloomberg; May 8) - On the southern shore of Australia’s Curtis Island, a jetty extends over a stretch of water to fill LNG carriers. There is another jetty 1.2 miles south and a third a further half-mile down the coast. For one industry veteran, the crowded shoreline represents a $10 billion missed opportunity. It’s the amount that could have been saved had the rivals that built three separate liquefaction plants on the island collaborated on a single LNG facility, said Martin Wilkes, a consultant with 20 years industry experience.

They could have produced the same amount of fuel but eliminated extra jetties, storage tanks and other costly infrastructure, he said. The extra cost may not have made energy giants flinch in the days of $100 oil, but after the biggest price collapse in a generation it can make the difference between a project living and dying. Companies like ExxonMobil are now looking at proposed projects from Mozambique to Papua New Guinea and asking how developers that would have been competitors can instead be partners.

“We talked to the Curtis Island projects in 2009 about combining and collaborating,” but they ended up building all three, said Wilkes, a Perth-based adviser at RISC Advisory. “There are significant savings to be made through collaboration, but people have to approach it in a way that’s different than the past." The shift toward combining projects is part of a larger cost-cutting effort across an LNG industry trying to snap a dry period of more than two years without a major new project sanctioned.

Producers are under pressure to keep costs down as a spate of new LNG plants come online over the next few years, threatening to overwhelm demand and keep a cap on prices. But if producers can’t find a way of affording new projects, that surplus could eventually flip to a deficit as cheap LNG spurs more consumption. Demand will outpace supply by 2026 without new developments being funded, according to Bloomberg New Energy Finance. The last large-scale onshore greenfield project to be funded was Russia’s Yamal LNG, which reached final investment decision in December 2014.

Read more: Oil and gas news briefs May 11 2017

Australian LNG plant operator will try U.S. tolling model

(Bloomberg; May 5) - Woodside Petroleum, operator of Australia’s oldest LNG plant, is seeking inspiration from the U.S. Gulf Coast. The North West Shelf venture in Dampier will allow third-parties to pay a capacity [“tolling”] fee for the plant to liquefy their gas, Woodside Managing Director Peter Coleman said May 5 in Perth. The plant, operating since 1989, will have spare capacity by the mid-2020s to handle new production. Its five liquefaction trains can produce 16.9 million metric tons of LNG per year.

The financial model is similar to U.S. plants, led by Cheniere Energy’s Sabine Pass, La., terminal, which contract out their liquefaction capacity, leaving clients to handle buying the feed gas and selling the LNG. So-called “tolling agreements” are a break from the decades-old past in Australia and the rest of the global LNG market, where companies traditionally combined exploration, pipelines and liquefaction into multibillion-dollar projects, with partners owning everything from the gas molecules to the export jetties.

“If you look at similar tolls in, for example, the Gulf of Mexico, which range anywhere from $2.75 to $3.75 [per million Btu] for processing, we believe North West Shelf can beat those numbers,” Coleman said. The tolling option, which Coleman said could start up by the end of June, would offer capacity to companies with untapped gas reserves offshore northwest Australia that may choose to pay for liquefaction services rather than build their own LNG plant. The North West Shelf project is a partnership between operator Woodside, BHP Billiton, BP, Chevron, Shell, Mitsubishi Corp. and Mitsui & Co.

Read more: Oil and gas news briefs May 8, 2017

Pakistan negotiates lower price in 15-year LNG deal with Eni

(Reuters; May 2) - Italian oil and gas company Eni said May 2 it had clinched a 15-year, 11-million-tonne liquefied natural gas deal to supply state-run importer Pakistan LNG, ending months of wrangling over the cost. The deal had been delayed since January, when Eni emerged as the winner of a bid to supply Pakistan’s gas-starved domestic market. At issue was trading house Gunvor's separate deal to supply Pakistan with LNG for five years at a price significantly below what Eni had offered in its 15-year contract.

While Pakistan swiftly approved Gunvor's deal, officials there started negotiations to persuade Eni to more closely align its prices with that of Gunvor, a Pakistani energy official and industry sources told Reuters. The negotiations resulted in Eni lowering its price, sources said. No details were announced. LNG buyers have been able to demand better pricing terms during the current global oversupply of the fuel.

Multi-year LNG deals tend to be linked to Brent crude oil prices, as a percentage of the price of a barrel. Gunvor's winning bid for the five-year supply came in at 11.6247 percent, and Eni's winning bid for the 15-year deal was 12.29 percent. At $50 oil, the LNG from Gunvor would be priced at about $5.80 per million Btu, while the Eni gas would have cost Pakistan about $6.15 before negotiations lowered the cost. Eni will source most of the LNG for Pakistan from Indonesia, the company said.

Read more: Oil and gas news briefs May 4, 2017

Ichthys LNG start-up delayed to first-quarter 2018

(The Australian; April 29) - Japan’s Inpex has sent its big Ichthys LNG floating processing platform sailing from its South Korean shipyard to Western Australia’s offshore Browse Basin, but also has announced more delays for the $US37 billion project. Inpex said April 28 that the first LNG output is now expected by the end of the first-quarter 2018 instead of a previous estimate of third-quarter 2017. The two liquefaction trains will be capable of producing 8.9 million metric tons of LNG per year.

The original timetable when the project was approved in 2012 at a budget of $US34 billion was for first gas late 2016. The latest delay is expected to see a small increase in development costs. Inpex is Japan’s largest oil and gas company. The announcement was made as the Ichthys central processing facility, one of two big offshore vessels built for the project in South Korea, set sail for the gas field off the West Australian coast. The processing facility will separate the gas from condensate, or light crude oil.

The gas will be piped 528 miles to Darwin for liquefaction at an onshore LNG plant, while the 100,000 barrels a day (peak production) of condensate will be loaded directly aboard tankers from a floating production and storage vessel anchored near the shallow-water field. The start-up delays come after contractual disputes at the LNG plant at Darwin and construction at the Korean shipyards. Inpex holds a 62.245 percent interest, with France’s Total at 30 percent and six Asian partners sharing the rest.

Read more: Oil and gas news briefs May 1 2017