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Gastech 93: Sellers Sing the Blues Buyers
28/02/1993
Last year in Kuala Lumpur, LNG sellers spent LNG 10 telling buyers that they could afford to pay a lot more for LNG and that they could prove it. Having had no positive response to their helpful suggestions, the sellers spent Gastech 93, nine months later and half a world away, saying that if only the buyers would sit down quietly and listen they would understand why they should indeed pay more. Trouble is that the most important LNG buyers in the world, those from Japan, stayed away from what was otherwise the most populated Gastech event ever. I have a sneaking suspicion that there is not universal agreement that we are in a prolonged LNG sellers market.
To be sure, there were buyers present. Indeed, the conference was opened with a paper from Pierre Gadonneix, the president of the second largest LNG buyer in the world, Gaz de France. But he mentioned only obliquely the rising cost of LNG chains and the more distant sources of supply and neither he nor anyone else suggested who amongst his own customers would be paying the increased prices the more prominent sellers agreed would be on the horizon. Thus the magic transformation from desire for a brave new world to deriving the practical measures needed to bring it about continues to elude the doyens of the LNG business. It was thus fitting that a great deal of Gastech should be taken up talking about booming domestic gas markets, star amongst those presented being that of Malaysia, a country previously connected to gas mostly through LNG.
Those wishing to commune with the great elusive buyer were not entirely disappointed, however. The event will be famous in the future for K Sawamura's convenient allusion to the tea-break buyer. There being no identifiable Japanese buyers on the stage or in the hall during open discussion, Mitsubishi's Sawamura (who was both in the hall and on the platform) related meeting one of this mythical breed in the tea break and transmitted his message to the eager masses assembled in the hall. Thus we learned that the great tea-break buyer does indeed have views on all the price rise requests of the sellers and the message is simple "if you have an idea on price, tell us". Thus the tea break buyer, the gas business equivalent of the man on the Clapham Omnibus, wants to talk, but someone else will have to come up with the ideas. And the tea break buyer would ideally like to depend on LNG for about a quarter of his needs if he is a power customer, but he has not decided on supply sources and demand projects after 2000.
Sawamura devoted a great deal of his paper to addressing concerns of Japanese buyers, and his remarks were thus the closest the delegates and other speakers came to hearing from the Japanese buyers, even if he too, it must be remembered, is mainly a seller. "Everyone is aware that the most important issue for the ....... from the market point of view is the extension of the Indonesian contracts. The demand/supply balance would be seriously affected should there be any problem with the extension of these contracts," he said. It is thus not surprising that it is the extension market, which few speakers mentioned, that has become key to the approach of Indonesia too. Sawamura also had some advice for those hoping to get their new projects launched by buyers who were then denied the benefit of expansion savings: "buyers are not extremely happy to see that the expansion quantity goes to third party buyers in another market, especially since the attractiveness of the venture in terms of reliability, price and other terms are the fruit of the wisdom and effort of the original parties." And why are they so worried? It's a matter of security: "They are afraid that the merit of security and more often quantity flexibility, could be lost by bringing in new parties with whom the system suppliability is shared but with less or no control."
So while buyers are after security and have given precious little indication that they are eagerly signing up new projects, many sellers are still pointing to ever rising mountain graphs of "demand", which of course will need high prices. It is not surprising that a few speakers warned the LNG community to approach the future with a bit more cautious reflection and willingness to listen to other views. Still, the mountain graphs came out but it is refreshing to see some new twists were added.
Although there is no idea of how to achieve the prices which producers promise will be needed to pay for more expensive supplies, there seems to be a surprising consensus on the subject of world gas supplies and future prospects. In the matter of who would need how much when and from where, most of the major speakers were using (broadly) the same numbers - the difference lay in what point they were using them to make. We're not talking hidden agendas here, just a question of emphasis or focus. There was little to choose between this assessment from Shell International Gas leader Roland Williams: "By 2010 global demand could reach 2,500 Bcm with overall some 150 Bcm of new gas supplies by pipeline or ~ needed to meet the full potential of European demand" and this view from Gadonneix: "Demand for gas should increase in Western Europe from 293 to 410-440 Bcm in 2020 and in Eastern Europe and the CIS from 792 to 1,200-1,300 Bcm". Williams even commented on the surprising similarity of his numbers and those of Gaz de France and keen observers of coincidence will note that the 150 Bcm increase by 2010 which Williams forecast for Europe is the same rounded number Gadonneix said Europe 5 imports just exceed today.
While producers found common cause on supply projections, their agreement on the scale of costs was more on the level of magnitude than detail. There was an underlying theme through many papers calling for cost reductions, the most controversial perhaps coming from BP's Andy Rower. He suggested that the over-production capacity which magically emerges from all LNG plants is unnecessary and that they could be designed closer to nameplate capacity. The incentive for cost cutting was clear from the global numbers which were universally large. Williams' "The aggregate investment to find, produce and transport new gas to the major markets over the next twenty years will be s6me $800-l,l00 billion, including pipelines and liquefaction but excluding local reticulation systems" is a statement no one took issue with. But where those billions will fall was open to more debate: Total's executive vice president Alain Brion asserted "One can estimate that a basic grassroots project in the Middle East to deliver 5 million tons a year of LNG to the Far East would cost from $5-6 billion, with $0.7-2 billion upstream, $2.5 billion on plant and $1.8 billion on shipping" while for a few billion more, Williams would fund "A single project in Sakhalin serving Far Eastern markets" which he estimated "may need as much as $9 billion to develop."
Now one way to get costs way down is to revamp an underperforming plant. Amidst all the talk about expensive LNG, the company once branded as having the most expensive LNG on offer, Sonatrach, quietly announced the lowest cost new LNG of the decade. MK Faid of Sonatrach said that volumes from the Algerian LNG plants would rise by 10 Bcm by the end of 1995. That revamp costs less than $2 billion by official estimates. What's more, Faid reminded delegates that Algeria was offering production-sharing contracts to outside investors and the possibility of sharing in future LNG projects, though I am not sure where this future meets that of the new 10 Bcm.
So, there are going to be some very different project costs. At last a difference was beginning to show. Producers targeting Europe had to contend with marginal economics Algerian LNG, while the Far East was faced with a long queue of greenfield projects. While Brion was enthusiastically promoting the possibilities of LNG plants in the Middle East supplying Far Eastern customers - as the rest of his paper makes clear - Williams' agenda was to show how newer gas must inevitably cost more so that, as night follows day, its price goes up. He stressed that gas in the ground will be developed only if it can find a market and, by implication, agreement on price. Where both the power speakers were singing the same tune, this time borrowing an oblique note from Gadonneix's school of composing, however, was in attempting to put their projects in a better light than the Natuna project, which they no doubt hoped Pertamina's Director of General Affairs H Baharuddin would throw into the ring for comparison. Baharuddin, however was having none of it, politely declining to engage in a public scrap over a project he said he would commercially formulate with Indonesia's buyers first, asserting that it was now ready for this treatment (something no one claimed for Sakhalin, for example). Baharuddin also managed to make common cause with quite a few of the other speakers, complimenting the European gas business for "acting like good gas chain players should" in helping to keep Russian gas lifelines open right after Gadonneix devoted some remarks in his welcoming address to lamenting European Community energy policy moves to break up the European gas business. Both Gadonneix and Baharuddin also had similar ideas about cooperation, Gadonneix calling for "enhanced consultation and cooperation between buyers and sellers, particularly through efforts to optimise the gas chain and reduce costs". This point was also underlined by Pierre Boutelant, gas director of Total, in his remarks in the discussion session.
Given the daunting array of international company forecasts, Baharuddin declined to focus on the numbers, but he did give those he provided an interesting twist which can be usefully contrasted to similar numbers presented in a more conventional way by Total's Brion. I have super-imposed them above, but first Baharuddin's twist. He asked the delegates to consider the supply with and without the Pacific's contracted LNG supplies alone; this picture (page 3) shows that current contracts from the Pacific suppliers are all gone in 2017 and that there is a big job just to extend this supply let alone filling new demand. There would appear to be a happy coincidence between his attention to extension and that of existing buyers. Brion, on the other hand, takes the conventional view of assuming existing supplies are extended and that only new demand causes a supply gap. His gap is similar to the expansion part of Baharuddin's composite supply/demand picture as can be seen on the composite (where the scale is larger on the Total bars than on the Pertamina graph, it should be noted) but the combination of the two gaps, as Baharuddin pointed out, is a tall order indeed.
Baharuddin too looked at projects from both sides, hinting as he did last year that for the next generation of LNG projects costs, and thus prices, must rise. At Gastech he still mentioned price - "it may be necessary to share some short-term pain in exchange for long-term gain." However, he also chose to emphasise the bonds between nations created by international gas supply contracts, the importance of security of supply and how U~~G contributed to the trade cycle of both buyers and sellers. It is worth remembering that all those Toyotas whizzing around Jakarta get manutacture4 using at least some Indonesian energy. Many of these echoes seemed to chime with Sawamura, who also stressed "the air of mutual trust, confidence and friendliness' prevailing in ING relationships. Should there be those in the LNG business who wish to see it function just like another commodity, neither Sawamura nor Baharuddin had much to encourage them.
Pierre Boutelant also put forward the suggestion that the future might see a trend towards "open books and cross-partnerships rather than buyers and sellers", a suggestion which slightly concerned Gordon Summers of Shell who saw this as potentially a move towards cost plus pricing. Sawamura had what was almost the last word, simply asking "how can we be sure that demand is going to keep on growing?" and, taking the example of Japan, said he was sure the process of demand slowing down had to happen.
Our coverage of Gastech will continue in the next issue of Gas Matters.