13th April 2015
I am sure many of Gaffney, Cline & Associates' clients will have read a great deal by now on the proposed Shell/BG transaction, especially given its magnitude and scope. What has attracted less attention is the role that this consolidation may have in advancing some of the innovation and change in the Asia-Pacific LNG market, that has already gathered a great deal of momentum.
The transaction creates the largest concentration of LNG in terms of both equity production and traded volumes, much of which is focused around the emerging Singapore trading hub. It is also occurring at a time when oil equivalent pricing is simply insufficient to provide enough economic certainty for most Pacific Basin LNG greenfield projects to receive an affirmative Final Investment Decision, leaving many projects sitting on the sidelines. Furthermore, the deal coincides with a wave of innovations such as bulk-breaking, miniaturisation, modularisation and floating concepts which are all gathering momentum as never before. Meanwhile, with Japanese gas and power unbundling gathering pace for the 2016 market opening, many LNG buyers are re-evaluating their gas procurement strategies, and wondering whether the traditional contracting approaches of the past are still valid, in this new era.
So, with all these different weather systems meeting over the Asia Pacific LNG market, the Shell/BG news may well be the last ingredient for the “perfect storm”. For those of us who have already weathered some tempestuous conditions leading from Canadian and US wholesale gas market changes in the 1980s, UK gas and power market deregulation in the 90s and the more recent changes in continental markets over the last few years, the signs are all there for a bumpy ride, which may leave behind much of the “received wisdom” in terms of how the Asia Pacific gas market functions.
So, what might we expect to see on the horizon?
First, will we see the more rapid emergence of an Asia-Pacific hub price as an acceptable basis for project finance? In the LNG space, lenders have accepted oil price risk for many decades now, and are typically uneasy about change. The same concerns were raised when market transformation in the UK led to the demise of oil based long term contracts, but lenders have come to accept gas price risk. With sufficient volume and liquidity, why not for Asia?
Second, does a gas on gas index also mitigate some of the market risk, soon to be borne by Japanese utilities as they vie with one another for market share? We are rapidly entering a phase where poor gas procurement decisions will lead to market loss and take or pay liabilities, one of the traps that the old British Gas plc fell into, and a reason behind the BG spin off in the first place.
Third, with diversification of LNG supply, based on multi billion dollar world class projects at one end of the spectrum, and small scale FLNG/FSRU niche players at the other, brought together by substantial traders and aggregators we are rapidly entering a world where supply risk stemming from upstream issues or operational shipping problems becomes largely consigned to history, with buyers and sellers able to rely on a deep and liquid regional market for LNG.
The Asia-Pacific market was already subject to some interesting weather patterns with unpredictable results. With this new factor on the horizon, we could well see benefits to both buyer and seller, from an accelerated pace of change. GCA will be monitoring events carefully, and assisting our clients to manage the risks and take advantage of the opportunities, as some of these new strategies come together.
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