US LNG: Transformation in the aftermath of the shale revolution

Jason Feer's picture
Jason Feer, Global Head of Business Intelligence , Poten & Partners
Comments: 0

Despite the promise of greater export capacity and warnings of low inventories, US gas prices remain stubbornly low amid recent efficiency improvements in production techniques.

With Gastech 2019 taking place in Houston, Texas, Gastech Insights spoke with Jason Feer, Global Head of Business Intelligence at Poten & Partners to delve deeper into the key topics of the market and hear his expert knowledge on what is next. 

Gastech Insights: Are we finally starting to see some bullish signs for natural gas?

Jason Feer: Gas prices are going to be rangebound in the medium term. Our long-term forecast in June for HH suggests an average of no more than $3/mmBtu through 2025 and reaching $4.50/mmBtu by 2040 from around $3.18/mmBtu now (in $2017). Even when oil tanked, we didn’t see a huge impact in terms of production. Well productivity has been rising fast and costs have been coming down fast, so even if prices are volatile a lot of people are making money, even at low prices.

Producers are getting much better at fracking. Laterals are four miles long and you can drill 10 wells from a single pad, and they need less water. They are better at stimulating wells, so producers can manage production declines better. The assumption is, that from an LNG point of view, there’s going to be plenty of gas around for the next 40-50 years, barring some horrible mess with fracking. There could be enough gas for 100-200 years.

But as soon as everyone agrees on something it turns out to be wrong so maybe in six months we’ll be having a different conversation.

Gastech Insights: Is shale gas still considered ‘unconventional’?

Jason Feer: Although in the US ‘unconventional’ has become shorthand for anything other than traditional drilling and it is becoming routine. However, in places such as Argentina, China and some others, it is still new. 

Gastech Insights: What else has changed?

Jason Feer: There’s been a bit of a revival in deep water E&P now that prices have come back. Shale has forced those guys to become dramatically cheaper. Now the emphasis is - if they’re going to survive - they’ve got to become more efficient.

Another thing that’s changed in the past ten years is understanding of seismic data – interpretation and use of data and computers have improved enormously. Engineers have been able to learn from years of gathering and interpreting tons of seismic data and now they’re so good at modelling how to place the wells for maximum efficiency, how to simulate them, so when they go in and do the fracking, the results align with what the models predicted. Some of it is really extraordinary.

Gastech Insights: How have all these changes affected financing of LNG projects?

Jason Feer: Financing has become complicated. The LNG business used to be a point-to-point, structured market that would take a stranded asset and turn it into something valuable using long-term contracts to credit-worthy European and Asian utilities. You could get returns of 10-12% with lower risk for something otherwise almost valueless.

But the US and a few other producers have disrupted the market, and that’s lead to volatility in supply and price. Producers have to deal with smaller, less credit-worthy counterparties not willing to sign long-term contracts and even if they do, the bank may not consider them bankable. Typically you had to sell 85-90% of volume on long-term contracts and the banks would shower you with money… now it’s very hard to get those contracts.

Gastech Insights: Apparently more long-term contracts are being signed this year?

Jason Feer: More than last year. There is a requirement for new LNG supply for 2023-2024 and beyond… but the problem is again if you’re a non-credit-worthy offtaker, want more flexibility or don’t know what your demand will be ... all of those things are now possible. There are millions of tons of available supply. It’s a buyers’ market, and they have more options than they used to. So you don’t see a lot of companies that are anxious to sign long-term contracts for large volumes of LNG that could support new project development.

Gastech Insights: So how are suppliers refining their sales strategy to deal with this?

Jason Feer: Contracts signed in the 80s and 90s are expiring. For example, the Japanese extended some contracts with Abu Dhabi’s Adnoc, but not all. So they’ve signed three-year deals with four or five traders like Trafigura. Traders accounted for 12-15% of the volume last year, while a few years ago there were hardly any. Majors like Shell, BP, and Total are portfolio players essentially acting as traders. It’s the classic disruption of a market where you had this highly structured market and everything is moving away from that to one extent or another. So suppliers are trying to become more flexible and they are trying to adapt their business models to the evolving market conditions.

Gastech Insights: So has the LNG market become commoditised?

Jason Feer: People have been talking about LNG becoming a commoditised market for a long time and it hasn’t happened. The infrastructure is expensive, but people are troubleshooting that. It’s never going to be as commoditised as some energy markets, but it’s a spectrum and there clearly is an evolution toward a more commoditised market than we have had in the past.

Gastech Insights: What solutions are required to help the market develop?

Jason Feer: There’s an urgent need for risk management tools if you’re going to see the continued evolution of the market. It’s hard and expensive to manage risk. Liquidity has taken off on the JKM index on ICE in the last two years. It’s very clear people are hedging cargoes via that contract. But as far as I know, no physical deals are done on it, so they’re trying to hang a futures contract with no trade. 

One major problem is cross-basin risk. You buy in the US and sell into Asia or Europe, but there are no off-the-shelf instruments that allow you to manage that risk. There are no spread swaps between Henry Hub and JKM for example; and JKM is an LNG price, while Henry Hub or NBP/TTF are natural gas prices. Quite frequently natural gas can move one way and LNG another, for example, if there are outages. It’s an ongoing basis risk issue. Because the market’s not developed you don’t have the array of standard swaps and futures to manage basis risk. The new CME contract in the US Gulf Coast is one of a number of efforts to develop Gulf Coast LNG pricing and risk management tools.

Gastech Insights: What else should producers be concerned about going forward?

Jason Feer: Shipping markets will tighten in the next year or so… people have fallen behind ordering vessels. Everyone concluded at about the same time shipping will be tight and orders are coming through, but probably a little too late to head off a tightening shipping market.

In terms of engineering innovation, the buzzword is small scale, but the problem is physics. There’s no shortcut to getting gas to 260 degrees below zero. If you make it smaller it’s more expensive on per ton basis. No one has managed to figure out how to get around that. That’s not to say that small-scale projects can’t work, but people need to be realistic about the costs associated with going small.

On the regulatory front the IMO rules coming into effect in 2010 are seen as the next big thing, but actually, there’s been a recent surge in orders for scrubbers. For vessels with a 20+ year lifespan switching to LNG can be much more expensive than installing a scrubber. It makes sense in some short-haul markets where vessels travel back and forth from the same two or three ports such as in the Baltics, for example, ferries from Finland to Denmark. We’re starting to see orders for LNG bunkering capacity, and a few for deepwater vessels.

We’ve seen estimates that 300-400 vessels globally over the next few years will be LNG fuelled. That’s a tiny fraction of the global shipping fleet. It will probably happen over time but it will be a long slow rise rather than the meteoric rise people were expecting. There’s such an established infrastructure for high sulphur fuel oil, people might just pay more for low sulphur marine diesel, and then those prices will rise.

Keen to share your expert views? Speak at the world's most influential global gas, LNG and energy conference! Submit your abstract choosing from a variety of strategic and technical themes to have the chance of speaking at Gastech 2019 in Houston.