What changes are being made to keep new liquefaction projects competitive?
In the short term, competition among contractors is one of the biggest factors in reducing costs but we know that won’t last forever. Long term, Modularization is lowering construction costs and that could lead to a real shift in the cost curve. If you look at the most cost competitive of the next wave of LNG, most of them are in the US and they are using modularized construction and smaller liquefaction trains. Also, we are starting to see more competition amongst liquefaction technologies which could keep downward pressure on costs for some time. When prices were high, buyers and sellers preferred to stick to what they know, but low prices lead to innovation and that’s why less-prevalent technologies are starting to gain market share.
Will shorter term contracts become the norm?
Yes and no. I believe that long-term contracts that expire over the next 10 years will probably be replaced with spot or mid-term contracts. Experienced LNG buyers know that new supply projects don’t get built without long-term contracts to support them. I think that savvy LNG buyers are going to ration the long-term portion of their portfolio for greenfield supply contracts, while they sign shorter term contracts with portfolio players and legacy supply projects under renewal. At the same time, the global LNG market is growing, which means there are a lot of new market participants and many of these new LNG buyers are in very price sensitive markets. They may be lured by shorter-term contracts at lower prices (and we have seen that trend in recent deals), but you have to think this is a bit of a trick by the big LNG suppliers out there. I don’t think you see such low-prices offered on long-term supply contracts today and when those low-priced short-term contracts roll-off, we may be in a very different market where buyers no longer have leverage. So it’s a risky game that should be managed with a portfolio of supply contracts: spot, short-term and long-term.
Ryan Schleicher will be speaking at the CWC World LNG Summit in Barcelona on ‘Regaining the Balance: When Will We Need New LNG Supply to Come Online?’