(EnergyAsia, June 11 2012, Monday) — In this inaugural OxfordPrinceton Series, EnergyAsia interviewed energy industry veteran Malcolm Johnson on the state of the global natural gas and LNG markets.
After more than 30 years with Shell in the natural gas/LNG sector, Mr Johnson now provides private consulting services as well as teaches energy professionals attending OxfordPrinceton Programme courses. Today, he is a director of eMJay LNG Limited providing expert advice and consulting services to the natural gas/LNG industries.
His time at Shell included a stint as Strategy and Planning Manager in the UK and Germany during the period of gas liberalisation in Europe.
He helped developed a number of LNG projects including over 13 years on the Sakhalin LNG project from inception to final investment decision involving the full range of commercial activities covering governance, marketing, contract negotiations and technical-commercial interface management. He has also provided commercial advice on the Elba LNG receiving terminal expansion, floating LNG, LNG contracts and project development assurance.
Today, we publish the second part of the interview. The first part appeared on Friday, June 8.
1. FLNG projects. How significant an impact will FLNGs will have on the world’s natgas supplies?There are significant reserves of natural gas offshore and uneconomic to develop via onshore terminals.
Floating LNG is a game changer in the LNG business. Following many years of research and development FLNG projects are moving ahead. Shell’s development of a floating facility for its Prelude field is under construction and is likely to set the trend for future developments. Other players are also seeking to develop offshore opportunities and address the challenges of offshore LNG production
The technical challenges should not be underestimated, not least the ability to move from field to field with varying gas qualities and the need for treatment; the requirement for liquids handling, the production facility to vessel transfer and the logistics of supplying facilities hundreds of kilometres offshore. Despite these challenges, there are a number of potential projects that are being considered based on a range of sizes between 1 and 5 mtpa. The amount liquids and the ability to handle them will be a key factor in the economic viability of potential projects.
2. The US EIA has estimated that China has twice as much as unconventional gas reserves as the US.
Recognising that it doesn’t have the technology and know-how, China has teamed up with Shell, Chevron and Total to develop these reserves. How fast do you think China will be able to advance its plans to become a major natgas producer?
China already produces conventional natural gas. The policy to increase the natural gas share of the energy mix requires development of unconventional gas from coal seams and shale gas. The speed with which shale gas reserves were developed in the US, it would not be surprising if unconventional resources are developed during the next few years in China.
Much will depend on the political support given by the Government to ensure rapid development. LNG imports took a long time to get off the ground, but once established they have grown significantly. Given the potential of unconventional gas to contribute to China’s energy needs, support is likely to be sooner rather than later.
3. Singapore plans to become a regional LNG trading hub serving the Asia Pacific markets. How would you rate its chances? What, in your opinion, would qualify a location to become an LNG trading centre?
Singapore is well established to be a trading hub for the Asia Pacific region and well placed to become an LNG trading hub.
The key issues will be:
o the liquidity in the LNG market and the extent to which short term volumes are available to be traded and sufficient to develop a supply portfolio that can be optimised;
o Availability of storage to smooth out market fluctuations, particularly seasonality in the Asian market;
o Availability of LNG shipping capacity on short term charter basis;
o Location close to the major suppliers and markets in the Asia Pacific region.
4. Australia’s LNG industry is booming. Some analysts have expressed concern that this boom is at its peak and that Australia’s LNG export plans will falter in the face of the shale gas boom in the US. Do you think Australia will lock in key customers in Asia before the US is able to get its LNG export plans / infrastructure in place?
Australia has a long track record as a reliable supplier to Asian markets and this is a key advantage in supplies to the Asian markets for whom supply security is a high priority. In addition, several of the LNG projects under construction already have Sales Agreements to underpin the development and support the financing. The ability to lock in additional customers will depend on the customer perception of the supply demand balance and the need to secure long term supplies in a growing market.
With so many projects under construction a key challenge is the squeeze on manpower and resources to develop these projects and the consequent impact on availability and costs. Experience in the latter part of the last decade showed that a rapid spurt in new projects can lead to a subsequent hiatus in new developments as costs rise. As the new projects come on-stream the short term “glut” can be difficult to absorb with possible downward pressure on prices. This has been symptomatic of the industry as a whole not just in Australia.
5. Qatar’s LNG industry is said to have enormous room for expansion, and is probably an under-estimated competitor to the developers of unconventional gas reserves. What is your assessment?
Qatar has an enormous reserve base and more importantly it is able to optimise sales across its whole portfolio based on a capacity of 77 million tonnes a year. Its location in the Middle East enables access all regional markets.
The key issue for Qatar is if and when it intends to lift the embargo on developing new capacity and therefore how long it would take to bring new capacity on stream.
6. Qatar’s bombshell. India received a shock in its current talks for an additional 3-million tonnes/year of LNG supplies from Qatar. India is prepared to pay US$10 per million BTU, a sharp increase from what it is currently paying under a 25-year term deal signed in 2004. Instead, Qatar wants US$16, which is what it is charging Japan now. This implies that Qatar views the Japanese price as the benchmark for Asia, and wants to herd India and the rest of Asia toward that direction. Do you think Qatar will succeed?
Qatar’s ability to optimise its portfolio of supplies enables it to take advantage of the highest value markets available.
The key issues are:
o The value of gas in the various local markets which is largely determined by the price of alternative energy sources available and whether the market is sustainable at higher prices. This will vary from market to market so that LNG will continue to be attracted to the higher value markets as a priority;
o Willingness of competing suppliers to undercut the Qatari prices in order to secure long or short term commitments
7. Indonesia is seeking higher prices from China, and has proposed to charge much less than US$10. How is this possible and will Indonesia start thinking higher prices?
Given that commercial negotiations for LNG supplies are confidential, it is difficult to comment on price levels.
However, Indonesia has experienced significant challenges in recent years to meet its contractual supply obligations due to decline in reserves at the Arun plant. In addition, its own domestic requirement for natural gas is putting pressure on the availability of natural gas for LNG exports. A key question for Indonesia is therefore how much LNG will be available for export. As a result, reliability of supplies as well as price are likely to feature strongly in negotiations with potential buyers.
14. How do you rate Russia’s chances of becoming a major LNG player in Asia over the next decade?
Russia is already an established LNG producer via the Sakhalin LNG project which has been operating successfully over the past couple of years. It is therefore establishing itself as a reliable supplier in the Asian LNG market.
There are sufficient reserves to expand the current project but the key issue will be whether the y will be developed by pipeline into Asia or via LNG.
There are plans to develop the Shtokman project in the Barents sea and exports from the Yamal peninsula in addition to pipeline exports to Europe. The key issues are the technical and commercial challenges to develop the projects. In the long term both of these projects may be developed but given the challenges, the timing is uncertain. In addition, Europe may be expected to be the key markets unless a northern shipping route can be established which will be an additional challenge. Nevertheless these mega projects are likely to significantly increase the LNH supply potential in the longer term.