The era of 20-year contracts is not over as suppliers cannot fund the massive investment required to build new LNG projects without long-term commitments from buyers, Peter Coleman, CEO of Australian LNG player Woodside said on Thursday.
Coleman said this at the LNG Producer-Consumer Conference in Tokyo where the industry’s biggest buyers and sellers met to discuss market flexibility as the Japan Fair Trade Commission is examining whether destination clauses in long-term sales contracts are anti-competitive.
This investigation could lead to the renegotiation of billions of dollars of existing long-term LNG contracts.
“Our industry has been built on 20-year term contracts because they are good for both buyers and sellers. They offer certainty of supply and predictability of pricing, which underpins investment,” Coleman said.
“The era of 20-year contracts is not over, because the old truths are still just that — suppliers cannot fund the massive investment required to build new LNG projects without long-term offtakers to provide the rates of return that our bankers and shareholders demand.”
According to Coleman, reluctance from buyers to commit to long-term contracts in recent years has been one of the major factors in developers deferring around $90 billion worth of liquefaction plant which would have added 93 million mt/year to global capacity.
“This is where a balance is needed,” he said.
As LNG projects, including Woodside’s North West Shelf Project, mature and pay back their original capital investment, sellers “can and should become more flexible” in their offerings to buyers.
However, shareholders and financiers simply won’t accept uncertainty for large new LNG investments, Coleman said.
“Just as Japanese utilities are now looking at long-term economics to extend and secure the futures of their nuclear power plants, our new projects must be underpinned [70%+] by long-term
He noted that this would ensure predictable investment in the new capacity that will be needed in the next decade and allow today’s market flexibility to be sustainable.
“A perfect storm”
Discussing the current market and future prospects, he noted that we’ve seen some “disruption” in the marketplace due to to the prolonged period of lower oil prices, with investment in new LNG supply slowing just as new spot trading opportunities have emerged.
“In 2016, we are not only facing a five-year period in which there will be an abundance of resources coming from the world’s liquefaction facilities, but an abundance all the way across the LNG supply chain — almost a perfect storm — in the availability of shipping, in the flexibility of contracts and in the existence of cheap regasification capacity. Today, 50% of the market is being taken up by new buyers,” he said.
According to Coleman, that abundance is largely a result of the strength of the partnership that exists between buyers and sellers of LNG, which will “continue to see all of us through periods of uncertainty.”
“In the spirit of that partnership, the business model has evolved as consumers have asked for and achieved flexibility in contract terms on price, destination and tenure. Most contracts don’t have
destination clauses any more.”
Coleman also touched upon the rapid emergence of new regasification markets such as Egypt, which has imported nearly 100 cargoes this year “exclusively under short-term contracts.”
“Increasing spot trade in a period of oversupply and low prices means more new buyers are likely to emerge, creating competition from non-traditional buyers, and creates risk for traditional buyers, particularly long-dated buyers, including Japan.”
Competition will also increase in a post-COP21 world which demands cleaner fuels.
“Although Japan plans to double its renewable energy generation to 22-24% of the total by 2030, reliance on LNG will still remain close to pre-Fukushima crisis levels at 27%,” Coleman said.
And as Woodside is about to launch its first LNG-fueled supply vessel in Western Australia, “it’s timely to ask ourselves what would happen if the entire global shipping fleet converted to lower- emission LNG?”
That market alone could account for more than 200 million mt/year of demand, Coleman said.
LNG World News Staff