 'Hot Prospects' for LNG, Study Says - By Ken Silverstein Daily IssueAlert 9/28/2004 Free Copyright 2004. All rights reserved. Despite the risks, liquefied natural gas has a bright future. With global consumption expected to dramatically increase, billions will be invested in LNG plants worldwide. The financial risks, though, will be minimized in those cases where utilities can put an LNG terminal into rate base or where a developer can sign a deal with a creditworthy party, and it will be maximized in those cases where political upheaval is possible. Those are the findings of Standard & Poor’s, authors of a paper called “Hot Prospects for a Cold Fuel.” The financing of LNG terminals, it says, will always be replete with credit concerns. In addition to counterparty risk, such projects will have to placate lenders’ concerns that political interests could interrupt the flow of operations. In any event, market price is always a top-of-mind issue, the report notes, because unless price remains above a certain threshold, developers would lose untold sums. “With delivered LNG costs in the range of $2.50 to $3.25 per million BTU, depending on shipping distances, it seems increasingly likely that LNG can effectively—and quite profitably—compete with pipeline gas in the U.S. and in parts of Europe, given current price trends,” says Peter Rigby, S&P analyst and author of the report. “In places where a utility can put an LNG terminal into its rate base or where a developer can sign a tolling contract with a creditworthy counterparty—a buyer or seller of LNG—LNG terminals will likely stand the best chance of reaching financial closure. Those that take merchant risk, volume or price, many find long-term investment grade financing more difficult.” The global liquefied natural gas market has expanded by 33 percent over the last five years. That’s because oil companies and LNG importers have spent $4 billion in each of those years to build new infrastructure, which includes terminals and ships, says the International Energy Agency in Paris. Over the next 30 years, $3.1 trillion will be invested into the LNG sector, it adds. In its vaporized state, natural gas is voluminous and therefore the rate of energy transferred moves slowly through high-pressured pipelines. Moreover, pipelines are not ubiquitous and so other means of transportation from off-shore points must be considered. Enter LNG, which is created by cooling natural gas to a temperature of minus 260 degrees Fahrenheit until it becomes liquid and occupies 1/600 of its gaseous volume. By reducing the volume, LNG can then be efficiently shipped in containers, although energy is consumed all along the value chain. To get to the gas, a conventional well must be drilled and a production facility constructed. The gas is then liquefied before it is shipped in special tankers to an LNG facility. There, it is “regasified.” A typical liquefying plant costs about $1 billion while the tankers that are used to transport it run about $200 million a piece. Meanwhile, the LNG terminal costs $300 million. Greater Investment Qatar has lots of potential. According to S&P, it plans to spend about $25 billion by 2010 to aggressively expand its export abilities. The Middle Eastern country’s exports have grown from almost nothing in 1996 to 17 million tons per year in 2004. Moreover, its customer base is growing from Japan and Korea into Europe and North America. Some of its deals include contracts signed with FPL Group Resources as well as ExxonMobil Corp. and ConocoPhillips, the credit agency adds. At the same time, Egypt has some deals in the works. Russia, which leads the world in natural gas reserves, is about to become a producer of LNG. Two facilities on the east coast of the country are expected to be commercialized in 2007 and 2008. Most of that product will be exported to Japan, although the United States has expressed keen interest in discovering ways to utilize those same resources. Likewise, Norway is expected to become a producer of LNG. The major Pacific basin exporters are Indonesia, Malaysia and Australia while the big ones in the Atlantic basin are Algeria, Nigeria, Trinidad and Libya. According to the U.S. Energy Information Administration, 151 LNG tankers were in operation in 2003. But, with the expected construction boom, another 46 such tankers are being added to the global fleet. “The LNG industry may actually need a proportionately greater investment in LNG receiving terminals,” says S&P’s Rigby. The United States is expected to become the biggest market for LNG, which would necessitate the construction of more LNG terminals. U.S. imports have swelled from 5 billion cubic feet per year in 1995 to almost 155 bcf in 2002—a mere fraction, however, of the 23 trillion cubic feet consumed annually in the U.S. One of the central questions remains, however—whether the high demand for natural gas by electric generators will keep prices high and support an LNG market. The underlying dynamics that affect natural gas prices are a moving target and may add to the recurring price volatility. For projects with lots of debt, it could cause credit risks similar to what the merchant generation sector has witnessed. And, the difficulty of getting sites permitted could also contribute to that uncertainty. By financing projects internally, S&P says that stronger companies can withstand the price fluctuations. That is, sponsors must be willing to contribute more equity to mitigate the commodity risks. Eager Producers While it would be ideal if developers put up more of their own capital, the reality is that LNG projects are highly leveraged. To secure debt financing, S&P says that developers must be creditworthy and able to obtain long-term contracts with other viable parties. Ultimately, the demand by end-users must substantiate the deal. Developers must put together a world class construction consortium. Ras Laffan in Qatar did just that, raising $1.2 billion in bonds from the U.S. capital markets and earning an investment grade rating in the process. Producers are eager to find new markets for gas that is not going to local markets. But to bring this idea to fruition, more capital is needed—not to mention some well thought-out plans to fortify those facilities against terrorists’ attacks. Fortunately, the field has attracted major companies including ExxonMobil, ChevronTexaco, Shell Gas and Power, and BP. Sempra Energy says that it expects to earn $50 million to $800 million in the LNG business by 2008. Still, all players want some political, regulatory and financial assurances before they continue to invest in the field. At least $100 billion in new investment is needed over the next decade, says Shell Gas and Power. LNG has promise and will likely experience high growth in the coming years if natural gas prices remain high. At the right price, LNG can be transported to the United States and elsewhere from gas-rich foreign sources giving producers a chance to earn adequate returns. But, ramping up production will take time and so it will remain a small portion of this nation's overall energy portfolio for the foreseeable future. UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2004. UtiliPoint International, Inc. All rights reserved. |
