LNG Industry: Interview with Jason Feer, Poten & Partners

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20 April 2016: “Ahead of the upcoming CWC World LNG & Gas Series 14^th Americas Summit & Exhibition to be held in Houston, Texas, US on 7 – 9 June 2016, CWC has conducted an interview with Jason Feer, Global Head of Business Intelligence, Poten & Partners.”

“What does the new world of LNG look like now?

“In the short-term, LNG is heading to a period of oversupply, volatility and low prices, with more short-term trading, spot trading and more liquidity in some markets. If you buy LNG then I think the short-term looks like a period when prices will generally be low and you will have a lot of options in terms of supply. If you sell LNG, the short-term looks like a time when it’s not the easiest to be a seller. There’s going to be a period when things don’t meet the expectations one had when the projects were started 10 – 12 years ago.

“How do you see the growing pool of smaller LNG buyers evolving?

“The pool of smaller buyers is an important source of demand going forward. If you look at who is going to need LNG over the next 10 – 20 years, large end users in Asia — the traditional consumers Japan and Korea — have a lot of contracts that are going to expire. A lot of that volume will be renewed, so there are definitely going to be large, credit-worthy consumers in the market for LNG. But there are also a large number of smaller and emerging consumers, some of which are looking to install FSRUs. Those emerging consumers include Bangladesh, Ghana, the Philippines and Uruguay. Some of them may be less credit-worthy than traditional buyers, and this may be perceived as higher risk by LNG sellers and banks making loans to build infrastructure. Those markets may need to produce a higher return and put in place greater security for those investments. What you traditionally dealt with in LNG were highly reliable, credit-worthy counterparties, for example, TEPCO, Tokyo Gas and KOGAS. Typically, buyers had lots of resources and often government backing, as well as high credit ratings. The emerging LNG markets going forward are not necessarily going to be like that. “People are recognising this and reacting to it. BP, for example, has just signed a deal with Ghana, indicating that BP is prepared to do business in a non-typical environment. There is some risk a seller may have to accept to place LNG at this time.

“What trends and commercial innovations are you seeing in the LNG industry?

“It is an interesting time for buyers, and a surprisingly challenging time to be a buyer. With the way the markets are, many think it is a great time to be a buyer and in a lot of ways it is because of the many supply options.A lot of buyers, however, are contending with the question of how they should buy LNG over the next 5 – 20 years. If you sign a long-term contract now, then the pricing won’t necessarily reflect today’s pricing. “Obviously short-term contracts linked to oil prices are showing much lower slopes than traditional long-term contracts. And you can lock in those low prices for four or five years. But as many forecasts show the market tightening over the next 4 – 8 years, longer-term contracts are more expensive. So buyers face an interesting challenge: try to either sign short-term agreements and worry about the long-term later, or try to structure contracts in a way that allows you to get the benefit of today’s price and also adjust so that you are in line with long-term price expectations. “Contracting is an area where there is a lot of room for innovation, looking into structure, pricing mechanisms and making sure you’re in line with the larger market when signing long-term. Price reviews haven’t traditionally been that extensive, but now they are becoming deeper — covering terms, seasonality, volume, etc. Innovation will be seen in contracts going forward and also in existing contracts being amended.

“Are you seeing more fragmentation or consolidation in the market at the moment? How are companies consolidating in the LNG industry at the moment, and how will this impact the future of the market?

“I don’t think we will see a wave of mergers. I can see some of the less robust backers of projects pulling out and I suppose you could see majors stepping into those projects. You may see some companies stepping into assets but I don’t think it will be an industry-wide trend.