Shifting energy policies are changing LNG buyer risk profiles

Wood Mackenzie has highlighted that evolving Asian governments’ energy policies are limiting the development of some new LNG supply options, and changing the risk profile of LNG procurement.

At Gastech 2014, Gavin Thompson, Head of Asia Pacific Gas & Power Research for Wood Mackenzie, commented: "The established buyers - Japan, Korea and Taiwan are seeing government indecision in areas such as the use of nuclear power in its energy policy increase LNG demand uncertainty.

New competition

“In addition, evolving gas and power market liberalisation policies present new competition for existing buyers, who would have historically underpinned new LNG trains but are now less confident of their future demand outlooks. Consequently, both traditional and new buyers are asking for smaller incremental volumes along with greater contractual and pricing flexibility. This is making financing of some proposed LNG projects more difficult."

Over 500 million tpa of new LNG supply capacity is currently proposed to come online between now and 2020, mostly from the US, Russia, Canada, East Africa and Australia. There are also a number of smaller projects in the pipeline, such as FLNG.

Asian LNG demand

Wood Mackenzie explained that even if overall Asian LNG demand growth remains strong, many new supply projects may not take final investment decision (FID) because of the uncertainties from LNG buyers.

"Greenfield LNG is never easy. But while numerous factors hinder new project development, domestic policies that influence buyer behaviour are critical, and perhaps less considered. Governments and buyers need to be acutely aware of the implications of energy policy, or sometimes a lack of energy policy, on the pace of some new LNG project development," Thompson added.

US LNG

The research firm’s presentation at Gastech suggested that in the current climate, options for new supply by 2020 appear increasingly limited to the US and Russia. Driven by a renewed focus on cost competitiveness, Asian government policy is indirectly favouring exports of US LNG, thanks to continuing low US gas prices. However, US LNG has associated new risks that buyers will need to manage, including Henry Hub price exposure, and political risk.

Russian LNG

Russian LNG is also making strong progress. Thompson explained: "Arguably, Russia has taken a view that the growth in US exports could frustrate its own future LNG ambitions and therefore it must promote supply into Asia at an accelerated pace to beat the US to market. But Russian LNG also comes with risks that will need to be managed - technical risk and political.”

Conclusion

In conclusion, Thompson said: "Government behaviours are now a key driver of the changing Asian LNG buyer risk appetite. These include Henry Hub price risk, new political risks in the US and Russia and new technical risks such as floating LNG. With Asian government policies discouraging a broader range of new supply options, managing these risks will become a new reality for buyers in the Pacific basin."

Adapted from press release by Katie Woodward

Read the article online at: https://www.lngindustry.com/liquid-natural-gas/25032014/energy_policies_affecting_lng_buyer_risk_profiles_335/