Transformation time for the LNG industry

Financial Times: Transformation time for the LNG industry

By Carola Hoyos, Chief Energy Correspondent
Published: April 19 2008 03:00 | Last updated: April 19 2008 03:00

When BG Group began to build a billion-dollar liquefied natural gas plant in Trinidad and Tobago in 1996, one of the big draws was the Caribbean islands’ proximity to the US, the world’s biggest natural gas consumer.

But a little more than a decade later, many of BG’s ships are heading half way around the world to Japan, rather than the company’s regasification terminal in Lake Charles, Texas.

High Asian economic growth and nuclear outages because of a recent earthquake in Japan have pushed prices paid in parts of the Pacific Rim to twice those in the US, where supply is relatively plentiful thanks to better than expected output from Canada and Texas shale.

BG has the industry’s greatest percentage of flexible cargoes and has responded to the arbitrage by directing 79 per cent of its ships to Asia and only 8 per cent to the US, according to Sanford Bernstein, the financial services group, which tracks LNG ships via satellites.

The 13,000 nautical-mile journeys those ships are making are vivid portrayals of how the market for liquefied natural gas is shifting from one where ships move almost exclusively on rigid 20-year contracts from one point on the globe to another, to a more flexible one where nimble BG is beating its bigger rivals – ExxonMobil, Royal Dutch Shell, BP and Total.

BG was ahead of its peers in buying natural gas that it did not itself help to extract from the ground and liquefy. It also negotiated contracts with producers that allowed the company to ship gas anywhere the company pleased and not to a single location.

Other oil companies with big gas deposits have clung more tightly to traditional contracts that secure a long-term home, and income stream for their gas.

BG needs that flexibility more than its peers because BG’s biggest hub is in the Atlantic basin, at a time when the market is shifting to the Pacific. That weakness was minimised yesterday when BG secured a deal to become Singapore’s principal gas supplier for 20 years, finding a home for the gas from the company’s Australian coal bed methane project.

BG’s ability to move gas around the world from many different sources was an important selling point. Frank Harris, analyst at Wood Mackenzie, the Edinburgh-based industry consultants, said: “Some buyers worried that projects extracting gas from coal beds were more complicated and may therefore be less reliable sources, but the flexibility in BG’s portfolio provides insurance and helped BG lock in the long-term contract.”

BG’s closest rival in natural gas is Royal Dutch Shell, which has less built-in flexibility but significantly deeper gas portfolio, with projects in Australia, Russia, Nigeria, Qatar, Iran, Malaysia, Oman and Brunei. Shell is branding itself increasingly as a gas and oil company, rather than emphasising oil first.

Shell is not the only big energy group where natural gas is becoming more important.

International oil companies have been turning to gas in the past three to five years to compensate for their oil reserves, many of which have been shrinking as the world’s biggest national oil companies deny them access to the largest remaining oil fields.

Analysts note that ExxonMobil, the world’s biggest energy group, would be in far worse shape today had it not acquired many of its existing gas assets in its takeover of Mobil in 1999.

Among the leading international oil companies the proven reserves life for gas is now 14.7 years, more than four years longer than that of their proven oil reserves. Meanwhile, gas as a percentage of overall production is also set to increase, with Wood Mackenzie estimating a jump from 37 per cent in 2007 to 39 per cent in 2009.

That has paid off handsomely for the likes of Shell, which last week signed a 25-year, $60bn deal to supply China with gas from a Qatari project in which it has a stake.

In fact, Qatar is similar to Trinidad and Tobago, in that Shell originally expected its cargoes from there to head to the US. Instead, they will be following BG’s spot cargoes to Asia, the new engine of the world’s economic growth.

Copyright The Financial Times Limited 2008

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