Potential US, China LNG Deal a Hot Topic at Flame Amsterdam 2017

A round-up of issues debated at Flame Amsterdam 2017, Europe’s premier gas and LNG conference, which took place May 8-11.

US China Deal

This year’s Flame was animated by the prospect of a trade deal between the US and China and its impact on the global LNG market.  However the China experts in attendance were less enthusiastic and more sceptical about China’s energy companies, both public and private, going on a LNG buying spree for:

“In many regions of China, there is no third party access to pipeline infrastructure permitted by the local monopoly gas supplier and pipeline operator, making it almost impossible for a private industrial customer to buy directly from abroad,” explained Yeo Lee, Founder and CEO of SIA Energy.

The prevailing view was that for the US to realize its dream of a LNG bonanza from a trade deal with China (since announced), a series of significant structural, organizational and market reforms would need to be implemented.

New Business Model Needed

The view that established business models would not suffice in the future was put forward on the grounds that the very nature of demand for power was likely to change significantly. The arrival of new technologies, such as the Internet of Things, digitalization and 3D printing would mean that in the future, much less energy would be needed. A case in point,  put forward by Dieter Helm – Fellow, New College Oxford, was  that,  “increasingly, industrial customers will only be interested in fixed- priced capacity contracts to power their machines, not buying energy on the spot markets.”  In some countries this would mean that gas would remain a base- load supplier of power generation, whilst in others it would act as a facilitator of stand-by and or peak power. Though, one thing is clear, small gas plants located across the grid are now the future, as they are much more bankable, responsive, economical and cheap to build, compared to large- scale power plants.

The End of OPEC

The dash to shale by the world’s big energy companies and the failure of OPEC to return oil prices to  anywhere near $100 per barrel has, in the view of some, inaugurated a sustained period of cheap oil.  Therefore, Saudi Aramco and the kingdom of Saudi Arabia face the real prospect of a decline in the value of their oil reserves over the coming years.  In consequence, Chris Main – Energy Markets Strategist, Citigroup Global Markets advised Russia and OPEC to focus on maintaining market share rather than price, “Since for many producers production costs mean they can make a good profit even at $40 a barrel.”

For shale operators, even at current prices, a bonanza in output and profits is in prospect. “Since the technology used is both cheap and offers a quick return compared to traditional billion- dollar mega projects,” said Dieter Helm – Fellow, New College Oxford. This scenario of sustained low oil prices requires energy companies to think about diversifying in order to deliver a whole range of goods and services across their entire energy value chain and perhaps build up their petrochemical operations?

Global LNG Prospects

Some speakers and participants were suggesting that LNG has a golden decade ahead of it, before the impact of new technologies on power generation, begins to have a significant negative impact on gas exporting dependent nations such as Algeria, Russia and Qatar. Tim Gould of the IEA suggested, “the main questions for prospective investors are: whether current conditions are favourable enough to support a twenty-year project and what will be the impact of new technologies on costs?”

In effect major gas exporting countries should start planning for a future, when demand from major markets such as Europe declines as renewables become predominant.  US LNG exporters expecting to become serious competitors in world markets, should remember that Russia has well established and improving pipeline connections to Europe with  Nordstream I  and the prospective Nordstream II gas pipeline and towards the East,  the Power of Siberia gas pipeline to China, due for completion in 2019. Moreover, China has adapted American shale technology to local conditions to become the second largest shale gas producer in the world. Such ongoing successes are likely to reduce demand for pipe gas and LNG imports in the near future.

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