As the number of U.S. LNG export projects expands, marketers and fundraisers are succeeding in accessing a broader range of import customers. Innovative strategies include tapping equity markets, vertically integrating projects, exporting to small-scale markets and introducing ceilings and floors into liquefaction contracts. Marketers of American LNG are depending on the deep, liquid financial markets, strong rule of law and low political risk to support these efforts.
Small-Scale LNG and Gas-to-Power in the Caribbean - The Caribbean region still sources 85% of primary energy from imported petroleum products (McIntyre et al., 2016, IMF). With the volatility in international and regional oil prices set in contrast with the benefits of stable and competitively-priced LNG exported from the nearby Gulf Coast, switching to gas-fired generation would seem like an easy decision.
In fact, as followers of Caribbean energy markets well understand, there have been numerous “false starts” in switching from oil-fired generation in the modern history of the region. The main stumbling block has been the inability to find attractive international financing due to low sovereign credit ratings, weak rule of law and the lack of a competitive source of natural gas. These markets are small (<2 mpta) and another factor preventing the growth of the gas industry is the fiscal space needed for nations to convert existing generation to run on gas or to build new CCGT plants.
Filling the gap today are private operators who can finance, build, own and operate the entire value chain and merchant traders who can source and arbitrage cargos while promising host governments a stable cost. Today much is currently being made of improved small-scale LNG economics and costs have indeed been significantly reduced, leading to advancements in the Bahamas, Dominican Republic and Jamaica, as we will see in the next section. The model is also actively being used in other island and coastal regions such as the Asia-Pacific.
Vertical integration finally comes to the shores of the U.S - Increasingly, the United States is seeing LNG liquefaction and export projects developed with ownership in the upstream gas assets or the downstream power assets.
An example of successful mid and downstream integration is the efforts of New Fortress Energy (NFE) in Jamaica to bring the country’s economy to 45% LNG penetration in just 4 years. NFE has financed, built, owned and now operates most of the LNG infrastructure in the country. This includes gas delivery pipelines, an FSU, a small “milk run” vessel, re-gasification capacity, LNG trucking, LNG passenger transport and the firm has even agreed to finance and construct a CCGT powerplant for the bauxite producer Jamalco in 2017. The all-in model by a U.S. firm ensures international standards are met and reduces variability while aligning stakeholders.
Tellurian, for example, puts upstream gas assets, pipelines and liquefaction terminal expenses into a “black box” with little visibility to outsiders. The company offers importers and purchasers a $3/MMBtu price loaded FOB at its Driftwood LNG terminal.
Public listing of LNG projects – Tellurian and NextDecade - Tellurian executed a reverse merger with a public company to list itself on NASDAQ as TELL. The company offers LNG importers an equity investment in exchange for a share of 27.6 mtpa of production. Offtakers invest instead of signing a long-term, Henry Hub-indexed contract. NextDecade similarly tapped equity markets in mid-2017.
Professionalizing and modernizing LNG marketing - According to Google Keyword data, LNG has gained in public perception in the past 5 years. The attention is due to factors such as increased awareness of climate and pollution, U.S./China trade negotiations and increased scrutiny of Russian gas contracts. LNG deal-making today is based on personal relationships between banks, project developers and importers; these bonds must still be leveraged and can be formed faster and more efficiently using targeted B2B outreach campaigns, like a typical enterprise sales process.
On a broader scale, marketers should also consider how entrepreneurial project developers like Tellurian and Cheniere are creating a brand image for their commodity product.
If you would like to hear more on global gas and LNG developments, be sure to register to attend the 2018 Gastech Exhibition and Conference and gain exclusive market insights by market experts.
Image courtesy of Alex Shinkarovsky
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