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LNG:
changing markets, changing economics
MJMENERGY is starting a new format of longer three or four-day
courses, the first of these LNG Economic Modeling is coming up in
Oxford, UK on the 28-31st October 2008. So we thoughts we’d take the
opportunity to give an introduction to our longer courses by
considering some of the issues surrounding LNG economics.
For nearly forty years since the birth of the international LNG
trade in 1964, liquefied natural gas (LNG) tended to be considered
an expensive alternative to pipeline gas, suitable mostly for
linking gas sources and markets where laying gas pipelines was
unfeasible or uneconomic such as supplies to Japan from Indonesia,
Malaysia, Australia, Alaska and the Middle East, or deliveries to
Spain from Algeria and other suppliers. Although LNG deliveries grew
fairly steadily from the 1970s and 1980s, explosive growth has
occurred from the late 1990s, driven both by economics and
supply/demand issues.
The first train at Atlantic LNG in April 1999 (Source: Atlantic LNG)
On the supply side the late 90’s saw major new producers emerging,
in particular Qatar, with first cargoes in 1996, and Nigeria and
Trinidad and Tobago in 1999. Unlike many previous LNG projects all
three of these producers started with ambitious expansion plans, and
have managed to bring additional trains to market rapidly, with
Qatar recently overtaking Algeria as the world’s largest LNG
producer. Increasing LNG supply coincided with growing gas demand,
and in particular demand for gas imports, as indigenous gas
production declined in the US and parts of Europe, especially the
UK, from 2000 onwards. US and European buyers saw LNG as providing
both much-needed additional supply, but also diversity of supply, to
some extent mitigating increasing dependency on traditional
suppliers (in a European context, especially Russia).
Around the same time a number of economic factors changed the LNG
market dynamics. Initially there were some reductions in LNG costs,
in particular at the Atlantic LNG project in Trinidad, where the
partners focused on driving down costs in production and
liquefaction to enable profitable delivery of LNG to the US market
at historically typical US prices of below $3/MMBtu. The second
economic factor was largely unforeseen, as prices the US, European
and Asian buyers were prepared to pay for LNG soared, either because
of a changing supply/demand match in the US, or increasing oil
prices which were indexed through to long-term LNG purchase
contracts in Europe and Asia. Although LNG production costs in some
cases also rose due to increasing world steel prices and prices for
feedstock gas, LNG production and shipping had become a surprisingly
lucrative business.
The Zeebrugge
LNG regasification terminal, in Belgium (Source: Fluxys LNG)
The massive expansion of liquefaction, shipping and regasification
capacity since 2000 has also driven, and been driven by, the
developing LNG spot market. Although occasional short-term trading
of LNG had occurred before 2000, typically when new projects started
up, or there were disruptions to planned supply of or demand for LNG
under contract, the arrival of new players led to a rapid expansion
of short-term LNG trading, so that spot cargoes now account for over
10% of worldwide LNG deliveries. The proportion of spot cargoes is
much higher in the Atlantic Basic (which in LNG-speak is considered
to include North America, the Caribbean, Europe, and North and West
Africa), where there is frequent trading and diversion of
Trinidadian, and to a lesser extent Nigerian, Algerian and Egyptian,
cargoes. Traditionally spot cargoes tended to trade below long-term
contract prices, but in recent years some spot cargoes have soared
above long-term contract prices, as American, British Spanish,
Japanese and Korean buyers have scrambled to purchase cargoes,
reputedly at prices above $20/MMBtu on some occasions. Two different
kinds of LNG markets for spot cargoes are emerging – sink markets
such as the US and the UK, and contract markets such as Spain and
Japan. A sink market occurs where there is a liquid gas trading
market such as the Henry Hub in Louisiana or the UK NBP. In a sink
market sellers can always sell volumes of LNG, but must take price
risk in the larger market. In contract markets where there is no
liquid gas trading market, sellers can only sell volumes where there
are specific buyers willing to pay, however, the price will be a
negotiation between the players, and in recent times has often been
above the existing long-term contract prices for LNG, as LNG buyers
will pay whatever is necessary in order to avoid for gas shortfalls,
for example following the shut-down of nuclear generation in Japan
in recent times. This can lead to spot LNG cargoes in Asia being
priced at a Henry Hub or NBP plus-basis.
The “Mozah”,
the first Q-Max ship, in July 2008 (Source: Qatargas)
As noted the recent trends in LNG pricing have been mostly upwards,
however, a significant new economic factor is due to emerge over the
next few months with the expected commissioning of the Qatargas 2
facilities. Qatargas 2 is a huge LNG project where partners Qatar
Petroleum, ExxonMobil and Total sought to harness the economies of
scale by building bigger LNG liquefaction trains and ships than have
ever been seen before. The liquefaction trains each have a nameplate
capacity of 7.8mtpa, contrasting with the current largest of around
5mtpa, and in July 2008 Qatargas named “Mozah”, the first of its new
Q-Max fleet of ships , which have a capacity of up to 266,000 m3 of
LNG, compared with the largest existing ships in the world LNG fleet
at around 165,000 m3. Qatargas claim this will enable them to make
savings of 40% of energy costs in the shipping of LNG, enabling them
to deliver large volumes of LNG to any market in the world for less
than $3/MMBtu. The key constraint is that currently there are only a
few LNG regas terminals capable of unloading such large ships,
notably Zeebrugge in Belgium, South Hook in the UK and Montoir in
France. A number of larger terminals are currently under
construction elsewhere, particularly in the US, but may be a year or
more further off. Going forward a key issue in LNG economics will be
assessing the impact of the huge trains and ships from Qatar, and
the changing dynamics of the global LNG market. MJMENERGY’s LNG
Economics Modeling course provides an ideal opportunity to examine
in detail the underlying economics of the LNG business and to
explore modeling approaches to LNG.
LNG Economic Modeling, covers four days and is presented
through a variety of different learning styles. This course was
first developed as an in-house training course for a major LNG
producer to train staff in the complexities of LNG economics
modelling. The elements of this excellent course have been designed
to systematically build a good understanding of the global market
and a confident approach to LNG economics. This course will be held
in Oxford at The Saïd Business School, Egrove Park, from 28th–31st
October 2008.
Programme
This course provides the perfect blend of conceptual studies
combined with a well designed and realistic economic modelling case
study that provides 'hands-on' experience of each link of the LNG
chain. Over four days the following areas are covered:
Day 1: An Introduction to economic modelling and liquefaction.
Day 2: Project structure and shipping.
Day 3: LNG terminals and supply.
Day 4: Pricing and trading.
Day 1: An Introduction to economic modelling and LNG
The first day’s lectures establish the basic processes of financial
modelling with a study of the different types of model. Having
established these principles the delegate is introduced to the
various aspects involved in the LNG chain from initial production to
final sales.
Day 1 Case Study: The Beau Town LNG Project
Having been provided with data on the upstream gas assets,
port facilities and costs delegates are required to produce an
economic model for the Beau Town development, identifying the number
of LNG trains required, project life, NPV etc.
Day 2: Project structure and shipping
The second day examines LNG project structure, shipping and the
relationship with upstream production, in particular the impact of
contracts, royalty and tax regimes along with production economics
and transfer pricing.
The issues of LNG transportation are explained through a careful
overview of shipping. Strategies, design, shipyards, size, costs,
schedules and diversions are all considered.
Day 2 Case Study: The LNG Shipping Business
Delegates are provided with a choice of ships and
destinations and, using the data provided, are required to produce
an economic model for one year of operation by the Clam Shipping
Company. This exercise allows delegates to examine the impact of
their choices regarding ships, routes and regasification terminals
on final profits.
Day 3: LNG terminals and supply
The lectures focus on terminals and supply, looking at construction,
planning and storage flexibility. An overview of key LNG markets
examines balancing and access to the gas infrastructure.
Day 3 Case Study: LNG Regasification Terminal
The third part of the LNG Economic Modelling Exercise
examines the economics of regasification terminals. Information is
provided on the cost of jetties, storage tanks and regasification
units from which delegates are required to develop an economic model
that is able to supply gas to a number of Gas Supply Agreements in
the most profitable fashion.
Day 4: Pricing and trading
Day four includes a detailed consideration of pricing and trading,
pricing structures and indexation, price modelling, types of
trading, patterns of arbitrage, trends and impacts of trading on
models.
Day 4 Case Study: LNG Value Chain
The final part of the LNG Economic Modelling Case Study
involves the development of a strategic overview of the company’s
assets and the overall value of the LNG project from gas field to
market.
The LNG Trading Game
As a great way of consolidating the learning programme,
delegates take part in the LNG Trading Game. Held during the
afternoon of Day 4 this popular game introduces an element of fun
offering the chance for demonstrations of financial skill and
dynamism. Delegates are allocated to one of five businesses which
are either sellers or buyers of LNG each having specific portfolios
of gas supplies and customers. The delegates are then able to trade
LNG spot cargoes to meet the requirements of the market. Good risk
strategy, market understanding and teamwork will gain the advantage
offering a real-world simulation in a safe setting.
Lecturers
Mike Madden and Phil Levermore are experienced gas industry
players and consultants and have advised on a number of LNG
projects.
The cost of the course is £2000 plus VAT per delegate. More
information, including a detailed programme and online booking
details, are available at
www.mjmenergy.com/LEM.htm The LNG
Economics Modeling course is also available as an in-house course –
for more information contact
Nick White on or phone +44 (0) 845
299 7072 (extension 2).
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