Hottest thing in LNG is producing power as record global glut looms

Seeking new ways to market their product, producers of liquefied natural gas are turning to an age-old technique: Packaging.
As demand for electricity booms in developing nations from South Africa to Chile, LNG producers are offering to supply both fuel and a power plant in partnership agreements that can lock in consumption of their product for years. For their customers, primarily governments, it means dealing with a single entity responsible for every link in the chain.
As many as five projects planned globally may be developed as integrated LNG-to-power, according to the Houston-based law firm Baker Botts. LNG producers Cheniere Energy and Total have package deals either in the works or discussed, while power plant constructor Siemens and vessel providers such Hoegh LNG Holdings Ltd offer their input as partners.
“That will be the major growth driver for LNG demand going forward,” Anatol Feygin, chief commercial officer at Cheniere, which is involved in an LNG-to-power project in Chile, said in an interview. “It’s a model we are looking to replicate globally.”
Global LNG production is expected to generate a record surplus of 46mn metric tonnes a year by 2019, or about 13% more than the market needs, according to Sanford C Bernstein & Co. Developing nations will boost demand for gas and power by more than 2% annually to 2040, while consumption in richer countries is close to stagnation, according to the International Energy Agency.
That’s spurring the industry to seek new marketing tools.
“What’s going on here is the convergence of drivers in the power sector on one hand and the LNG sector on the other,” said Robin Mizrahi, a London-based partner at Baker Botts, in a telephone interview. “The key driver on the LNG side is LNG suppliers looking for new markets.”
A new gas plant is more efficient than a coal plant, is at least two years quicker to build and helps cut emissions, said Sabine Dall’Omo, chief executive officer at Siemens AG’s South Africa unit.
Europe’s biggest engineering company have expressed interest in South Africa’s $3.7bn gas-to-power programme, initially planned at two ports. The new system will help diversify the nation’s generation mix that’s reliant on coal for more than 75% of its power generation. An initial 3,000 megawatts at the ports are expected to add capacity in the aftermath of the managed blackouts in 2015.
Plunging gas costs also make the fuel even more attractive to developing nations. The average LNG price will probably drop to $3.8 per million British thermal units next year, according to Energy Aspects’ forecast. Spot LNG in northeast Asia fell 14% to $8.30 last week, while prices in southwest Europe rose 6.3% to $8.50, according to World Gas Intelligence in New York.
Such projects, which can use either a floating storage and regasification unit to import LNG or land-based infrastructure, are often considered an interim option until nations develop their own gas resources. A combined solution may cost $1bn or more depending on the plant’s capacity, according to Anne-Sophie Corbeau, a research fellow at the King Abdullah Petroleum Studies & Research Center.
Cheniere’s investment in the Chile project is not “simply an investment opportunity,” but a backbone on which it can expand production capacity in the US, Feygin said.
The first exporter of LNG from the US in more than four decades will have exclusive rights to deliver the fuel for 15 years to an FSRU that will be provided by Hoegh LNG Holdings Ltd. LNG supplies are set to start in 2019 and will be delivered via a 40-mile pipeline to an initial 600-megawatt gas-fired power plant.
Brazil is also considering LNG-to-power projects. Companies “arriving early at this party” will be the winners amid initiatives to reform the nation’s gas and power sector, said Claudio Steuer, a director at SyEnergy, a UK-based energy consultant with experience in Africa, South America and Southeast Asia.
The first such deal was pioneered in Malta last year by the trading unit of State Oil Company of the Azerbaijan Republic as a means of breaking into the LNG market.
“The focus on LNG to power projects is very logical from a supplier’s perspective,” said Martin Lambert, managing director at Brightlands Energy Ltd, an industry consultant outside London. “New power generation is one of the few ways, if not the only way, to create enough demand in the required timescale.”

‘Idled spending may trigger next spike’

Bloomberg/Singapore
Liquefied natural gas prices falling to the lowest in a decade last year spurred fresh demand while suppressing investment in new production, potentially leading to shortages and price spikes next decade, according to a new Bloomberg New Energy Finance report.
Global annual LNG consumption is seen rising to 422mn tonnes by 2030, almost two-thirds higher than last year and almost 13% above BNEF’s previous forecast in June. China, India and a swarm of smaller countries sped up buying after prices fell and as they sought to shift to the cleaner-burning fuel amid air pollution from burning coal, BNEF analysts including Maggie Kuang said in the report.
Buyers are poised to take advantage of an array of under-construction projects expected to come online over the next few years, which will keep fuel prices low. That poses a long-term danger, though, as producers may continue an investment drought that may eventually result in future supply deficits, Kuang said.
“Healthy long-term demand growth prospects and very few final investment decisions expected before 2020 are posing a supply shortage risk which can drive up LNG prices massively post-2025,” Kuang said in the report.
Small LNG buyers are key to the new demand growth. Countries that imported less than 5mn tonnes a year accounted for 19% of total consumption last year, up from 15% in 2014. Those nations will account for 31% of global use by 2030, larger than the combined volume from China and India, Kuang said.
Conversely, demand from the world’s two largest users, Japan and South Korea, is expected to decline or remain flat through next decade. Japan in particular, with several supply contracts from the US about to go into effect, will emerge as an important LNG merchant as it redirects unneeded cargoes elsewhere.