BG Group Analyzes Impact of US LNG Developments
OREANDA-NEWS. August 15, 2014. Future exports represent a new source of supply in our global portfolio.
Within the last decade, gas industry developments in the US and market factors in Asia have had a transformative impact on the global LNG landscape.
In the US, advances in horizontal drilling and hydraulic fracturing have unlocked the potential of huge shale basins, replenishing the US market with cheap gas and all but halting LNG shipments to what was forecast to become one of the world’s largest LNG cargo destinations. According to the US Energy Information Administration, the US holds an estimated 2,431 trillion cubic feet (tcf) in technically recoverable resources – enough to meet current levels of demand for almost 100 years.
The growth of Asian economies, combined with Japan’s shift away from nuclear power in the wake of the Fukushima tragedy, helped absorb the supply excess that resulted from reduced US demand. As a result, we have seen Atlantic basin trade shift to the Pacific region in recent years, where demand is expected to continue to grow.
BG Group has positioned itself to leverage its previous US import position and its extensive LNG customer network to take advantage of new market opportunities. Out of approximately 30 LNG export projects that have been announced in response to US shale gas discoveries, BG Group has an interest in two of the largest and most advanced projects: Sabine Pass and Lake Charles. Both are planned to produce and ship LNG before the end of the decade, taking advantage of a widened Panama Canal that by the end of 2015 is expected to shave a week or more off voyages from the US Gulf Coast to Asian ports.
BG Group’s US interests
In October 2011, BG Group signed the first offtake agreement for LNG to be produced at Cheniere Energy’s Sabine Pass LNG terminal near the Texas/Louisiana border. The project is the only facility currently under construction. According to Cheniere, construction on trains 1 and 2 is approximately 69 percent complete, with first LNG projected as early as late 2015. Trains 3 and 4 are 36 percent complete. BG Group’s 20-year offtake agreement for LNG from Sabine Pass includes 3.5 million tonnes per annum (mtpa) from train 1 plus an additional 2.0 mtpa ramping up across all four trains.
BG Group was also quick to see the potential for exports from the Lake Charles facility, located about 70 miles northeast of Sabine Pass. It was from Lake Charles that a BG Group predecessor launched the first trans-Atlantic shipment of LNG in 1959. More than 40 years later, BG Group entered into a long-term agreement to market 100 percent of the LNG import capacity from the Trunkline LNG facility in Lake Charles, before now entering into an agreement to market all exports.
BG Group has partnered with Energy Transfer to add export capability to the Trunkline facility, using the existing regasification infrastructure to cost-effectively develop a three-train liquefaction plant. In August 2013, the project received US Department of Energy approval to export up to 15 million mtpa of LNG to non-free trade agreement (non-FTA) nations. In March 2014, we filed an application with the Federal Energy Regulatory Commission seeking approval for the siting, construction, ownership and operations of the proposed project. Next we will select an engineering, procurement and construction contractor, and the tendering process is currently underway. We anticipate making a final investment decision in 2015, which could result in first LNG as early as 2019.
"The value driver of US LNG exports is the spread between US natural gas and global LNG prices," said Betsy Spomer, Senior Vice President of Global Business Development. "Before entering into agreements to buy LNG from Sabine Pass and partner with Energy Transfer on the development of Lake Charles, we took a careful look at project economics and projections of future gas and LNG prices. We believe the size of the US natural gas resource and the liquidity of the US natural gas market make these projects look good – now and into the future."
While Energy Transfer will finance construction and own the facility, BG Group will manage construction and operate the completed facility. The construction costs will be passed on to BG Group as a component of the toll paid to Energy Transfer to utilise the liquefaction capacity from the facility. In this respect, BG Group will need to utilise its experience and relationships to complete the project on time and to budget.
Risk of oversupply?
With Sabine Pass, Lake Charles and other US projects potentially coming online during this and the next decade, might the LNG market be headed toward a period of oversupply?
BG Group does not believe that this will be the case, for two reasons. First, it is extremely unlikely that all of the announced US projects will be built. As has been demonstrated in past supply-growth cycles, only those projects with established, well-capitalised developers with LNG experience tend to be built.
Second, demand for LNG is expected to remain strong. Industry experts estimate growth of around 5 percent per year until 2025, requiring the development of up to 150 mtpa of new LNG supply above that which is already under construction.
"We estimate that the US could become an exporter of 60 to 70 mtpa of LNG by 2025," said Andrew Walker, Vice President of Global LNG. "US exports will be a major contributor to supply growth, but so too will projects in western Canada and eastern Africa. All will need to be developed to meet customer demand in the high-growth LNG markets of Asia in this timeframe – and BG’s planned export projects in these countries are very well placed to be part of this supply."
In the not-so-distant future, LNG carriers will be taking on cargo at new US liquefaction terminals. Early on, BG Group saw the potential of this trade, and is now at the vanguard of an emerging new business that will reshape the industry while reinforcing BG Group’s standing as a leader in the LNG space.
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