Here, Professor Stern speaks to Gas Today about why the LNG 18 conference is so important to the industry, and where he thinks the LNG industry will head next amid difficult market conditions.
What key issues will your plenary session at the LNG 18 conference be focused on?
The session is on the `Globalisation of Gas’ and we shall be discussing how LNG has provided the catalyst for gas to break out of the regional market paradigm which has dominated for the past several decades, and the extent to which it has become a truly global industry.
The industry is globalising not just in terms of the huge expansion of supply which is under way, but also the increase in the numbers and the geographical diversification of exporting and particularly importing countries.
Another aspect which the session may touch upon is the convergence of prices in different regions, and the degree to which it may be possible to speak about a `global gas price’ (taking into account differences in transportation costs).
Australian LNG operators are facing a difficult outlook with low commodity prices and high supply. How long do you believe it will take until the market will correct itself?
The general consensus is that it will take until at least 2020 before the current surplus/low price cycle turns around. It is difficult to imagine circumstances in which the turnaround could happen more quickly, unless for some reason a major gas or LNG supplier drops out of the market.
However, lower gas and LNG prices may restart demand growth, particularly in regions such as South East Asia, Latin America and the Middle East which are relatively new LNG markets and have considerable growth potential.
However the biggest LNG demand potential is probably in China where a combination of lower than expected economic (and hence energy demand) growth, combined with high domestic gas prices, has slashed Chinese gas demand growth rates from the double digits of the early 2010s. A revival of Chinese GDP growth combined with concern over urban air quality could result in increased demand for gas and LNG which, given the size of the country would translate into substantial LNG requirements.
In addition, the current low prices will result in substantial restriction of new gas and LNG supply developments, and possible accelerated decline in production in older provinces such as the North Sea with high operating costs. The combination of reduced supply and increased demand will eventually lead to supply/demand balance and higher prices. The critical question is when that will be.
How do you believe the United States’ emerging LNG industry will alter the dynamics of the international LNG industry?
Five US LNG export projects have taken final investment decision (FID) and the first at Sabine Pass began to export its first cargoes this month. Clearly the US intends to become major exporter of LNG and has the substantial advantage of a very large and low cost shale gas resource.
However, the cost advantage of US LNG delivered to European and Asian markets – which seemed extremely significant from 2011-14 – has eroded substantially with the collapse in oil and gas prices. While this may be a temporary phenomenon, as we prepare for LNG 18 it is clear that at current prices US LNG offtakers intending to delivery to either Europe or Asia will not be able to cover their full costs.
This may have the effect of discouraging additional US LNG projects from taking FID. It may also mean that Australian LNG exports will face less competition from US projects in their major markets in Asia.
What are the current main focuses of the Oxford Institute for Energy Studies’ Natural Gas Programme?
The OIES Natural Gas Programme’s major new book “˜LNG Markets in Transition: the great reconfiguration’, will be published by Oxford University Press in September 2016.
The book examines developments in the LNG industry since 2000 in some detail focussing on the changes which have taken place and how these will evolve.
There are chapters on project structure, pricing, costs, and technology as well as regional supply and demand prospects. We have produced other books and papers which have looked at many of these issues but in this book we bring all the strands of our analysis together under the specific heading of LNG.
As the subtitle of the book suggests, we believe that the landscape of the industry is changing fundamentally as LNG breaks out of its previous niche status and becomes increasingly relevant as a global source of energy.
What do you believe will be the key messages for the international LNG industry coming out of the LNG 18 conference?
The current very difficult situation will probably reveal the need for significant change compared with the industry’s development over the past decade.
One important change is likely to be around how LNG is contracted and priced – the old certainties of long term contracts, destination restrictions and oil-linked pricing are changing and may need to change further.
Another key message may be about costs of future LNG projects. In the current low price environment, very few new projects are likely to be economically viable and there will be a challenge to reduce costs in the industry, perhaps through new technologies and modularisation of projects.