1 Liquefied Natural Gas: Global Overview Alan Townsend World Bank Myanmar, October 2015.

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Liquefied Natural Gas:

Global OverviewAlan Townsend

World BankMyanmar, October 2015

2 2Source: GIIGNL

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This infographic shows new LNG export and import capacity due online in 2015 and 2016. The size of the circle reflects the total volume from each country. Export capacity is colored green, import capacity is red, in million tons per annum. Source: ICIS

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LNG TradeEast of Suez dominates

Major changes are coming this year, with the first Lower 48 US gas exports

Two other major, new sources of LNG may emerge by 2025: Canada and Mozambique

Source of Map: GIIGNL

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Flat global demand, but dynamic shifts within itAsian buyers becoming more price sensitive

Demand growth in China and India has been lower than generally expected

New buyers continue to appear (2014: Lithuania, Singapore)

Source: GIIGNL

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“Flexible” LNG has become a major part of the marketOverall market is bigger, with growing liquidity

Export projects has generally had good technical performance and have been debottlenecked, so can produce more than their contractual obligations

Investors and financiers have become comfortable with projects that are not fully sold out on a long term basis

In recent years, demand has evolved with price sensitivity becoming a factor in influencing demand at the margin

With more offtake commitments coming from marketers, the true size of the flexible market may already be larger than shown

Source: GIIGNL

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LNG production capacity growth will outpace demand growth for the next few years

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New supply coming on strong . . .

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1010

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Supply at risk

Ambitious proposals from large resource basins are at risk in a low oil price environment because of high costs

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Alaska

20 5

Latin America

31 27

West Africa

48

East Africa

7228

SE Asia

MENA

151

5

Europe 26 27

Russia

© 2015 IHSSource: IHS Energy

Australia

Existing Under construction ProposedNote: Units are MMtons.

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US Lower 48

243

Canada

345

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East Med.

86 66

Australia

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Gas prices 1997-2014 ($/mmBtu) [BP Statistical Review of World Energy

2015]

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2014-2015 prices: seismic shiftsUp to 50% declines in NE Asia

Europe – prices down by at least a third

Transportation differentials are too low to easily justify trade from the Atlantic basin to the Pacific (including re-exports)

In 2015, Egypt, Pakistan, and Jordan have emerged to take some of these volumes

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The downtrend continues . . .

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But where will prices go?The FGE view (at left) is not untypical and reflects an industry consensus about:

• Cost of production of crude oil (from $50-$60 per barrel to $80-$90)

• Cost of production of US natural gas, which is assumed to be the marginal supply to world markets

Source: FACTS Global Energy

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• US Natural Gas Exports – permanent feature of global trade?

• Charts show results from the Rice World Gas Trade Model (RWGTM) from model runs in 2014 – before the collapse in prices

• Analysis suggests that, even with some periods of short-term imbalances, there is enough supply and demand response such that in the long run the differential between the US and East Asia is just enough to allow for exports

• The implication is more globally integrated natural gas markets

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How is LNG priced?Some common formulas are shown at right (indicative values shown)

Spot cargos might be purchased on a fixed price basis, with no formula

US export tolling contracts focus only on the liquefaction fee – the purchase of natural gas, its delivery to the LNG plant, and the transport of LNG are the assumed by the buyer of the tolling service

NBP is also often used as an index especially for deals in the Atlantic basin

Singapore has launched an LNG spot price index; Tokyo and Shanghai next?

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Traditional DES* pricing in Asia: P = A(x) + BPrice = JCC times a percentage + a constant

Example: ($60/barrel x 15%) + $1 = $10/mmBtu

Cheniere model for pricing US exports, FOBPrice = Henry Hub times 115% plus a liquefaction fee

Example: ($3/mmBtu x 115%) + $3 = $6.45/mmBtuFOB, so add $3 for transport to Asia = $9.45/mmBtu

Kansai purchase from BP, DESPrice = Henry Hub times 115% plus a constant

Example: ($3/mmBtu x 115%) + $7 = $10.45/mmBtuSeller provides liquefaction and transport

*delivered ex-ship

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LNG Shipping: big increases in vessel numbers, shipping capacity

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LNG shipping glut

Short-term charter rates have fallen far below vessel replacement costs

From Fearnleys, October 22, 2015:

• Spot $32,000 per day

• 1 yr T/C $35,000 per day

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2323

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Shipping is tighter in the medium term than one might think . . . Unless trades are optimized

Is Kansai-Engie deal a model for future optimization of supply portfolios and shipping?

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Who trades LNG(selected examples)

Traders

Portfolio Marketers

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Production Companies

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Who buys LNG

80 million tons in 2014 (1/3)(Tepco/Chubu jv JERA formed in 2015)

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Other power and gas utilities, national oil companies, traders, power generators, and portfolio marketers

The rest (2/3)

Smaller share of LNG on LTC

For large buyers, new LTC’s will favor new projects

Desire for more gas-on-gas pricing but oil-linked pricing will not disappear; new gas hubs support

Portfolio approach not limited to sources but to contract tenors, indexation terms

Key TrendsLongTerm

Contracts

NewSupply

Desirable

Gas-On-gasPricing

Realportfolios

for bigbuyers

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Small and mid-scale LNG shippingVibrancy but challenging economics

New ships for coastal China trade

New designs for bunkering, small-scale trade

A boom in the Baltic

New, lower cost containment approaches

Multi-carriers have emerged – when will they start trading LNG?

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1.00

2.00

3.00

4.00

5.00

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Economies of Scale in LNG Shipping

10,000 cu m

35,000 cu m

155,000 cu m

Thousands of nautical miles

USD

per

mm

Btu

LNG Shipping Economics• Strong economies of scale

• Moving small cargos long distances will be expensive

• Hub-and-spoke models will work when there is a logical hub

• Panama could be a logical hub

• Bunkering market gives Panama a key comparative advantage versus other players in Central America

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