Small-scale LNG becomes popular as slumping oil crimps megaprojects

By REBECCA PENTY
Bloomberg

Suddenly small is the next big thing in the liquefied natural gas (LNG) business.

Slumping energy prices are crimping the ability of suppliers to finance new export terminals, giving small, highly-focused efforts the edge over the megaprojects the industry has favored for years.

In Canada, a group led by AltaGas is moving forward on a C$600 million ($475.7 million) plan to be among the first companies to export gas from that country’s Pacific Coast in 2018. It’s a project that could bypass a plan by Petronas to build a terminal that would handle 21 times more product that’s been stalled as the company considers how to trim its C$36 billion cost.

In recent years, energy companies have clamored to develop LNG export proposals for coastlines around the world to satiate Asian demand for gas, driven by economic growth in China and a move away from nuclear power in Japan. The idea is to pipe gas gathered inland and offshore to refrigeration complexes near the coast that liquefy the fuel for export on tankers.

Now, with finances tight, smaller projects have an advantage in that “the capital costs are small, and they can get to production pretty quickly,” said Uday Turaga, CEO of ADI Analytics in Houston. “People are a little down on the large-scale LNG projects.”

The change in thinking comes as Japan’s weighted import price of LNG is poised to average between $9 and $10/MMBtu in 2015, compared with $15.75 in 2014, according to IHS. Chevron and BG Group are among supermajors reducing LNG spending, as the industry cuts $86 billion from capital budgets this year, according to RBC Dominion Securities.

Shareholder Concerns

Big oil companies will probably delay the priciest facilities as they struggle to appease shareholders seeking quick returns, said William Frohnhoefer, an analyst at BTIG in New York. While a $2.5 billion LNG project could pay for itself in three to five years, a $60 billion plan would take 12 to 15 years to recoup, he said.

Oil in New York rose 0.2% to $49.38/bbl at 7:58 a.m. Crude has lost 52% in the past year.

“Most of the guys who are backing megaprojects, which are majors, are guys that are putting out all kinds of fires right now on their balance sheets,” Frohnhoefer said. “Smaller is better in the sense that it’s easier to get a small project funded.”

Going small has been a niche play in an industry driven by visions of hulking refrigeration complexes to liquefy gas from offshore fields in Indonesia to shale formations in Texas. Some 17 small proposals are being weighed in North America yet none are under construction, according to ADI Analytics.

Petronas, as state-owned Petroliam Nasional is known, is trying to cut the cost of its Canadian project that would export 12 million tpy before making a decision on whether to proceed. The Petronas-led venture, which had originally targeted startup in 2018, can still come online by 2019 if an investment decision is made by mid-year, Michael Culbert, CEO of the Pacific NorthWest LNG project, said in a December interview.

Final Decision

Meanwhile, AltaGas and its partners see no problem financing their project, which would start shipping 550,000 tpy of LNG in 2018 from a barge located at the end of a winding waterway near Kitimat, British Columbia. The consortium plans to make a final investment decision later this year.

“There certainly is an advantage with being smaller, especially in this climate,” said David Harris, chief operating officer of Calgary-based AltaGas. “We’ll be ahead of competitors in the area by a fair amount, not months but years.”

Woodfibre LNG, a small Canadian LNG project backed by Indonesian billionaire Sukanto Tanoto’s RGE Group, is also vying to be the first exporter in Canada, with startup scheduled for as early as 2017.

Head Scratching

Massive cost overruns for some of the megaprojects have thrown into question whether building big in fact leads to greater efficiencies, said Michael Stoppard, chief strategist of global gas at IHS in London.

A raft of small LNG facilities in China, including some developed by Xinjiang-based Guanghui Energy Co., demonstrated construction costs as low as $500/ton of LNG capacity, compared with the $1,500 typical of megaprojects, Stoppard said.

“The industry is scratching its head and trying to understand why small, peaking LNG plants in China appear to cost so much less,” Stoppard said. “The LNG development model needs to be revisited and is being revisited. I think that bigger is not necessarily better.”

Not all large LNG projects are being put on hold as some of the biggest proposals are taking advantage of cost savings from using existing pipelines, storage facilities and reasonably priced labor to move ahead.

Cheniere Energy, based in Houston, is currently building the Sabine Pass LNG project using some existing infrastructure in Louisiana to export 18 million tpy and is considering a 50% expansion of the venture.

Competitive Advantage

Before the price-induced cost cuts, seven times the export capacity was proposed as needed to meet demand, said Mary Hemmingsen, a partner who leads the LNG practice of KPMG International Cooperative in Canada. Even large projects being delayed can ultimately move ahead if proponents find ways to lower the price tag now, she said.

“For those that can reduce their cost structure, take advantage of a more attractive supply chain market and find their projects to be in that post-2020 period, there could be some significant competitive advantage,” Hemmingsen said. “It requires a steely determination and discipline.”

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