by Myrna Velasco – December 31, 2015
from Manila Bulletin
Rome, Italy – With collapsing oil prices, unsettled pricing dynamics and the uncertainties in regulatory frameworks and policies that could push it in the energy mix, the gas industry’s goal of reaching “golden age” remains a precarious proposition.
These have been the common thread of discussions in the recently concluded 16th World LNG Summit, wherein the global players of the industry fleshed out what could have been a challenging – yet still promising future for the growing liquefied natural gas (LNG) industry.
Amid the hurdles though, players in the sector reckon that the technology must take its place in the energy fuel’s totem pole – given the distinct advantages it could provide in the chain – not only in bringing down the sector’s carbon emissions but more importantly the synergy it could provide to an electricity system’s need for mid-merit capacity as well as the complement it could have to the intermittency of renewables.
And with improved technologies, gas is now similarly positioned as fuel option to off-grid areas via “break bulk” technology and services deployment from LNG terminals – or what the industry would refer to as “small is beautiful’ paradigm.
In terms of infrastructure development though, the prescription of many would be floating storage and regasification units (FSRUs) as they are seen easier to install and would also entail lower project costs.
According to Fred Jones, founder of American firm Delfin LNG, FSRU facilities could be built shorter by 12 to 18 months compared to a greenfield onshore LNG terminal; and they could also be implemented half the cost with less community impact.
LNG hubs are similarly anticipated to be the fixture in regional markets to stimulate gas supply security in specific domains.
To get to these development landscapes though, the challenges have been massive for the gas sector – which is into shifting era from conventionals to shale-gas underpinned expanding LNG industry.
LOW OIL PRICES: MAJOR CHALLENGE
“The largest single change in the LNG market in 2015 had been the oil prices,” Meg Gentle, president of US firm Cheniere has noted.
With the cost of global oil hitting rock bottom at some point from the last quarter of 2014 and the first months of 2015, implementation of some LNG projects backpedaled and the planned shift to gas of the transport sector of some countries had also been thrown into the backseat.
Industry analysts are still currently projecting mega-glut in oil supply that could then continually pull down prices for a longer duration – a dilemma that the LNG players have to contend with and must navigate for corresponding solutions.
Didik Sasongko Widi, vice president for LNG of Indonesian firm PT Pertamina has stressed that “gas demand growth is challenged by too low oil price,” with this dilemma posing significant risks to investors such as lower demand from switching primarily in fuel for vehicles; and profit squeeze to some players.
From such initial price shocks though, the industry seem to be getting its way better moving forward. Ms Gentle has indicated “there would be unprecedented opportunity for the LNG market to grow in 2016,” while stressing that the industry has also been getting more resilient to market challenges.
What LNG markets observed in the past months were increased spot cargo transactions, relaxation in destination restrictions and diversification of pricing.
Given major supply push, Frédéric Barnaud, executive director for LNG, oil and shipping of Russian firm Gazprom has added that “the LNG market will double in size in the next 10 years” and will then account for 30 to 40% of global gas trade.
Asia is seen as a vital ‘market growth’ for LNG, primarily India and China and several other markets. In particular, the year 2016 will see the first LNG exports from the United States while LNG output will also be expanding significantly in several producing countries, including Australia.
WOBBLY PRICING STRUCTURE
With oil-linked pricing now turning as a thing of the past for the gas industry, gas sellers and buyers are prompted to be more creative when it comes to pricing negotiations in their contracts.
Mr. Barnaud has asserted that this new regime of LNG abundance will see “the end of traditional utility buyers,” especially in this era of low oil price environment.
He prescribes that the new norm will likely be ‘mid-term contracting’, although for the year 2015, it has been noted that some markets opted to take more on spot purchases.
The Gazprom executive has emphasized that volatility still blurs pricing perspectives, while noting that “multiple price indexes are available, but no transparent and tradable LNG pricing yet.”
Global industry players have qualified that the LNG industry had grown to be a buyers’ market, “due to the fall in oil prices, economic recession and increase in shale gas production.”
With these prevailing conditions, the prescription is for buyers and sellers to sort out “flexible contract conditions and relatively low prices compared to competing fuels… for LNG to maintain its competitive edge over other energy sources.”
BID FOR REGULATORY, POLICY SUPPORT
For the technology to firmly secure its place in the energy mix, players in some countries have been batting for regulatory and policy support that would cement the inclusion of gas in the fuel diversification terrain – and this is also the case for the Philippines.
Mr Barnaud has noted though that there is still that “seeming lack of assertiveness of the gas industry versus governments” on the policy push that must set carbon tax on higher CO2 emitting fuels or even those with subsidies for their transport sector.
In the Philippines, the 30-percent share of gas in its energy sector’s further diversification has yet to gain traction. It requires re-writing of some edicts, but the Department of Energy (DOE) is still far into getting there.
The plan of the Philippine-DOE is for a 30-30-30 rule, with coal cornering 30-percent; and the other 30-percent by renewables; while the rest would be on other fuels.
New builds are already dominated by coal plants; and the country is confronted with one major dilemma – its replacement fuel at the lapse of the 25-year service contract of the Malampaya field – which by then may no longer be able to satiate the fuel requirement of the country’s commercially-operating gas plants.
The country is likewise placing its bet on LNG importation – but blueprinted projects have yet to take off from the ground. Sponsors and developers, by far, are still on the wait-and-see ledge when it comes to policy support and regulatory framework that will reinforce the gas industry’s rebirth.
Until then, it would still be considerably “chaos” for the industry, with the “chaos” only coming when tangible solutions on the country’s future gas needs would be concretely identified and accepted as viable by investors.