In the U.S., there has been a lobbying battle between users and producers since 2012 whether exporting America's cheap natural gas will boost the economy and fix the trade deficit. Politicians and managers from the one side of the aisle claim that the huge quantities of natural gas found in North America thanks to horizontal drilling and hydraulic fracturing, can be exported and will be a huge boon to the U.S. economy without hurting the current low price in the domestic market.
Meanwhile, politicians and managers from the other side of the aisle say that exporting natural gas will change significantly the current supply and demand balance in the domestic market, hurting the supply side and pushing the natural gas price much higher. The current glut of shale gas has changed to the better the outlook for "Made in America." Fifty new major industrial projects have been announced in several energy intensive industries, including petrochemical, steel, and fertilizer manufacturing. Many of these industries require energy in the form of heat to transform a raw material, such as iron ore, into a finished product, such as steel. For others, such as fertilizer, chemical, and oil refining manufacturers, the energy products supply both raw materials and heat to create their products.
Too much gas for export will wipe out a competitive advantage U.S. producers have over foreign companies, according to Dow Chemical (NYSE:DOW). Spencer Abraham, a former U.S. energy secretary who has worked with gas exporters since leaving office, said in an interview: "Nobody would be advocating this if we only had 10 more years of natural gas supplies. The fact is that we have at least a century or more."
Charles Ebinger is an energy analyst at the Brookings Institution, a Washington public policy group. In 2012, he wrote a study and found that exports would have only a modest impact on domestic prices and on manufacturers that use the fuel. Increased production would settle prices once exports begin, according to an Energy Department study.
However, the U.S. is not alone in its effort to commercialize its abundant natural gas resources. Canada is also going to be an exporter of liquefied natural gas from the North American shale bonanza to Asia's $150 billion LNG market. The Canadians don't have any objections to exporting gas and Canada is closer to Asia, which cuts down on shipping costs.
The group of the primary liquefied natural gas (or LNG) exporters also consists of Qatar, Malaysia, Algeria, Nigeria, Egypt, Trinidad & Tobago, Oman and Indonesia as of today. The most recent entrant in this group is Angola, which is trying to meet growing LNG demand in its region and internationally.
LNG Plants And Projects Update
The capital cost of a natural gas export plant is at least $10 billion. This is one of the primary reasons why the world LNG market is expected to remain tight over the coming years, with very limited new LNG capacity. Global LNG demand is expected to exceed production around the end of this decade with the deficit growing to 100 million metric tons a year by 2025, Chevron's (NYSE:CVX) CEO John Watson said in a presentation to analysts in New York last March. Demand for the fuel will increase at an estimated average rate of 15 million tons a year through 2025, led by growth in Asian nations such as Japan, South Korea and Taiwan, Watson said.
South Korea and Japan, which has gas needs to be filled for the next decades because of the Fukushima nuclear disaster, are just two examples of emerging LNG markets in my opinion. The appetite for energy remains big in the developed economies like United Kingdom and France while it is growing rapidly in China, Vietnam, Brazil and India. This paints a wildly optimistic picture for the LNG sector.
After all, let's have a quick look at the latest developments on some major LNG plants and projects:
1) After several operational start-up problems (i.e. fires, pipeline collapses and labor shortages), first gas from Angola's LNG plant was shipped and sold to state-owned Sonangol few days ago. Chevron plans one or two shipments in June and July before performing checks on its systems and resuming output in the fourth quarter of 2013. Chevron is Angola LNG's largest shareholder with a 36.4% stake. BP p.l.c. (NYSE:BP), Eni SpA (NYSE:E) and Total (NYSE:TOT) each hold 13.6%, while Sonangol has 22.8%.
Angola's LNG exports impacted positively the rates, which rose for the first time in almost five months, according to Fearnley LNG, a shipbroker in Oslo. This shipbroker also notes that buyers in Kuwait, Israel and Asia are pushing prices for the frozen fuel above $14 per million British thermal units.
2) In May 2013, the Sabine Pass LNG project got the go-ahead to build a third and fourth gas liquefaction plant next to its export terminal. Cheniere Energy (NYSEMKT:LNG) expects to complete all of the required resource reports and file applications with the Federal Energy Regulatory Commission (FERC) for trains five and six by September 2013. Cheniere Energy has secured LNG delivery contracts with six energy companies, including India's Gail Ltd, France's Total , and Korea Gas Corporation.
Cheniere Energy won federal approval to build Sabine Pass in Louisiana in April 2012. Sabine Pass may start shipping gas in 2015 or 2016. The company has plans for more than one LNG liquefaction facility, but the Sabine Pass facility will be the first. Sabine Pass is authorized to export 2.2 Bcf/d and the construction of the first two LNG trains is 30% complete.
LNG demand in Asia is huge compared with the rest of the world. Counting the capacity of production of the Asia-Pacific region, the capacity can be roughly assessed at 13 Bcf/d, which is significantly insufficient to fill the need of an average 22 Bcf/d of LNG, according to Cheniere's presentation of March 2013.
3) In May 2013, the Department of Energy (DOE) approved the Freeport LNG Expansion and FLNG Liquefaction project to export LNG to countries without a free trade agreement with the U.S. ConocoPhillips (NYSE:COP) owns a 50% interest in the general partner entity responsible for managing construction and operations of Freeport LNG and has agreed to provide a substantial majority of the debt financing for the Freeport LNG facility.
However, the Freeport facility, which is located on Quintana Island in Texas, is still subject to an environmental review and final approval. Freeport LNG has been authorized to export up to 1.4 Bcf/d of natural gas for the next 20 years. The construction is expected to commence in late 2013 and will take four to five years to be completed. The start-up of the liquefaction project is estimated to occur in 2017.
4) In February 2013, Apache (NYSE:APA) completed the deal with Chevron to build and operate the Kitimat LNG project and develop world-class natural gas resources at the Liard and Horn River basins in British Columbia, Canada.
Chevron and Apache each have become a 50% owner of the Kitimat LNG plant, the Pacific Trail Pipelines and 644,000 gross undeveloped acres in the Horn River and Liard basins. Chevron will assume operatorship of the LNG plant and the pipeline. Encana (NYSE:ECA) and EOG Resources (NYSE:EOG), formerly 30% non-operating owners in Kitimat LNG and Pacific Trail Pipelines, sold their interests and exited the venture.
5) In March 2013, Apache announced that its Australian subsidiary and its partners have signed long-term sales and purchase agreements with Chubu Electric Power Company, for LNG from the Chevron-operated Wheatstone Project in Western Australia. The Wheatstone partners have agreed to supply Chubu Electric with 1 million metric tons per annum (mtpa) of LNG for up to 20 years.
Apache has 13% share in the Wheatstone Project, which is one of Australia's largest resource projects. This project will include two LNG trains and a domestic gas plant. Apache and KUFPEC Australia, a subsidiary of Kuwait Foreign Petroleum, will supply gas produced from the Julimar and Brunello fields. Apache has a 65% interest in the upstream Julimar Development Project and is the operator. The Wheatstone plant is about 10% complete, and is scheduled to ship its first cargo out in 2016.
6) Chevron has also been investing big in the $52 billion Gorgon LNG development in Australia, which is now 60% complete. In December 2012, Chevron increased its cost estimates for the Gorgon project from $43 billion to $52 billion, due to labour costs and productivity issues. Gorgon LNG has about 65% of its LNG sold under long-term contracts, short of the 80-90% that LNG producers typically aim to have sold under long-term contracts.
Hopefully, Chevron will keep Gorgon's cost under control. Few days ago, the International Energy Agency warned of further delays and cost blowouts at Australia's pipeline of LNG projects, many of which it says may be too exposed to any changes in LNG pricing in the Asian markets.
Pending Applications And Reassessments Of Projects
1) The Obama administration is reviewing applications for 20 gas export terminals, including the one of Sempra Energy (SRE) which is also seeking a permit to build a multibillion-dollar terminal. President Obama said in a speech in Costa Rica recently that U.S. exports may "facilitate lower costs" for other nations but he did not make it clear whether he would approve additional sales overseas. If all win approval, the facilities could ship the equivalent of 41% of total U.S. production this year, according to Energy Department data.
In the U.S., Dominion Resources (NYSE:D) is another company that wants to enter the LNG business. The company is still waiting approval for its Cove Point LNG terminal in Maryland, which is going to play a major role in the company's future growth. The facility has a storage capacity of 14.6 Bcf with seven storage tanks and a daily send-out capacity of 1.8 Bcf. The export facilities would be designed to process an average of 750 Mcf/d of inlet feed gas and an estimated 4.5 to 5.0 Mtpa (metric tons per annum) of LNG output. The construction of export facilities is expected to begin in March 2014, with commissioning in March 2017. DOE hasn't set a timetable for this application.
2) Canada has issued export licenses to three Western Canadian LNG projects (LNG Canada, Kitimat LNG and the Douglas Channel Energy Partnership) so far, but none of those projects has reached final investment decisions to begin construction.
A) LNG Canada is a joint venture comprising Shell Canada, Korea Gas Corporation, Mitsubishi Corporation and PetroChina that is proposing to build and operate an LNG export terminal in Kitimat, British Columbia.
B) Kitimat LNG is the project owned by Apache and Chevron as mentioned above.
C) Douglas Channel Energy Partnership plans to begin shipping as much as 700,000 tons of LNG annually from a floating plant near Kitimat, British Columbia, in mid-2015. The project is a joint venture of the Haisla Nation aboriginal community, Golar LNG and LNG Partners, a Houston-based firm.
All together, the trio of approved Canadian projects will have the capacity to ship 4.66 billion cubic feet of gas a day, more than double the 2.2 billion cubic feet of capacity that has been permitted in the U.S.
However, there are also several pending applications for LNG projects in Canada. For instance, British energy company BG Group filed an application recently to export as much as 21.6 million tons of LNG per year from a proposed terminal on Ridley Island near Prince Rupert, British Columbia.
In early June 2013, Pieridae Energy Canada, the developer of the Goldboro LNG project in Nova Scotia, signed a 20-year sales agreement to start delivering 5 million mt/year to German utility E.ON in the first quarter of 2020. The LNG pricing is "based on market prices of natural gas in the Western European market," Pieridae said.
The Goldboro terminal will export up to 10 million mt/year, with on-site storage capacity of 690,000 cubic meters of LNG. Approval of an environmental assessment application by the Nova Scotia government would set the stage for a final investment decision in 2015 and the start of construction late that year. Goldboro plans to get most of its natural gas from several Canadian sources with part of it also coming from Marcellus Shale production in New York, and Pennsylvania.
3) Meanwhile, some energy companies may put seven LNG export projects on hold in Australia due to budget overruns and project delays which are casting major doubts on the profitability and viability of these projects.
Greece And LNG
In my recent articles I analyzed the situation in Greece where things have looked to turn around lately. I also spotted some investment opportunities and recommended ways about how an international investor can benefit from this reversal. My articles are here, here and here.
Where do Greece and its maritime industry stand on the emerging global LNG trade? Before answering this, we need to bear in mind that oversupply in the maritime industry and the purchase of new vessels have led to mounting debt and continued net losses for many companies of the dry bulk sector lately, including Greek ones. The Baltic Dry Index, a measure of commodity shipping costs, has plunged more than 90% since touching a record high in 2008, and this plunge has been hurting more and more companies of the maritime industry. The drop in rates has left them unable to pay off their debt and if the commodities-shipping market remains dreadful, it's likely things would turn sour for more shipping companies.
For instance, STX Pan Ocean went broke few days ago. After failing to get the financial support from Korea Development Bank, the Korean shipping company STX Pan Ocean filed for bankruptcy in early June. This bankruptcy happened after the collapse of the other Korean "Korea Line Corporation " and a year after the bankruptcy of the Japanese "Sanko Steamship," highlighting the depth and intensity of the crisis in the freight market.
Britain's oldest shipping firm, Stephenson Clarke Shipping Ltd and Italian dry freight group Deiulemar Shipping have also gone broke.
This situation has impacted negatively the Greek shipping industry too, and Excel Maritime is a Greek company that has severe financial problems currently. This does not surprise me because Greece has the world's largest merchant fleet. After Greece, Japan follows as the second major global shipping power, with China in third place and Germany fourth.
After all, can the LNG sector help the Greek shipping industry offset the losses from the dry bulk sector? Do the Greek ship-owners have a stake in this new specialized segment of the maritime transport? Are they stuck with the bulk carriers and the containers or have they taken proactive steps shifting their strategy towards LNG tankers?
It seems that Greeks believe in the long-term future of the LNG transport and they are not absent from this developing energy trend. The local powerful shipowning dynasties with global reach have started their newbuilding investments and they look willing to play a dynamic role in the LNG market too. Their investments in LNG vessels are presently estimated at ~$10 billion, including the vessels which are currently in operation.
According to Clarkson Research, almost half of the 82 LNG carriers ordered or under construction globally are destined to a Greek shipping company. The average vessel on order has around 150,000 cubic meters of gas capacity.
1) Maran Gas Maritime belongs to Aggelikoussis, another traditional shipping figure with roots in the island of Chios. This island (along with its satellite islands of Oinousses and Psara) has had a great reputation for the maritime industry for hundreds of years.
The Angelicoussis group has ordered 11 ships worth over $2 billion from Daewoo Shipbuilding and Marine Engineering and Hyundai Sambo Heavy Industries. They are scheduled for delivery in 2015. Maran Gas operates another five LNG carriers.
2) GasLog (NYSE:GLOG) is controlled by Peter Livanos and the company's fleet consists of 12 wholly owned LNG carriers, including two ships delivered in 2010, three ships delivered in 2013 and seven LNG carriers on order from Samsung Heavy Industries. This is in an investment program of over $2 billion. The delivery of the remaining carriers currently under construction, will be completed by 2015.
In addition, GasLog currently has 12 LNG carriers operating under its technical management for external customers.
GasLog's offices are located in Greece and Monaco. Livanos also owns the Sverys maritime holding and the Euronav oil tanker company making their clout in the global shipping sector quite substantial.
3) Dynagas belongs to Prokopiou who has orders for seven vessels in Hyundai. Dynagas already operates three LNG carriers. It is worth mentioning that since 2004 Prokopiou's other maritime companies have ordered around 70 vessels and the total tonnage his fleet owns exceeds 10 million DWT, a number larger than the entire fleet of countries such as France, Italy or Brazil.
According to Prokopiou: "The idea of transporting liquefied natural gas was droning around in my brain since 2003. I could see that this would be the century of gas. There are plentiful supplies, it is half the price of oil and it is also a quick fix for pollution and CO2 emissions. This is particularly important for the cities of China and India as they expand, to keep pollution under control."
After an epic journey through more than 3,000 miles of the bleak, icy expanse of the Northern Sea Route, accompanied by two nuclear-powered Russian icebreakers, the Ob River, a 288-metre LNG tanker with a capacity of 84,682 dwt tonnes chartered by Russian energy giant Gazprom (OTCPK:OGZPY), arrived at the Japanese port of Tobata a few months ago. The ship belongs to Dynagas. That was the first ever sea voyage of an LNG cargo through the frozen waters north of Siberia, cutting the distance traveled from Norway to Japan by more than 5,000 miles compared to the Suez Canal route.
4) Cardiff Marine, owned by Economou, has ordered four LNG vessels and has an option for another two worth around $1 billion. The total size of the fleet of all ships owned by Economou exceeds 100 units. Economou is the owner of DryShips (NASDAQ:DRYS) and Ocean Rig UDW (ORIG), which will be analyzed in my future articles in conjunction with other offshore drillers.
5) Three LNG ships have been ordered by Thenamaris, owned by Dinos Martinos. The vessels are being constructed by the Samsung shipbuilders in South Korea. The Martinos Brothers, who own a string of maritime-related corporations, cumulatively possess over 110 vessels. They have been major players in world oil trade for decades, and with these new orders indicate the desire to move into liquefied natural gas as well.
6) Alpha Tankers & Freighters, which belongs to Christos Kanellakis, has ordered two LNG ships from the STX Offshore & Shipbuilding of Korea. Delivery of the tankers is projected for April 2015.
7) Tsakos Energy Navigation (NYSE:TNP) has ordered one LNG carrier of 174,000 cbm Tri-Fuel with scheduled delivery in Q1 2016. Tsakos also maintains an option for one more and may have another eight LNG carriers constructed in the next six years.
Apart from these two LNG vessels above, the company's fleet also includes 47 tankers (28 product carriers, 19 crude tankers), totaling 4.9 million dwt. It is worth noting that 32 of out these 49 vessels are under fixed or fixed with profit sharing contracts.
8) Almi Gas, owned by Costas Fostiropoulos, has also placed two orders for LNG ships.
In February 2013, Gazprom and Levant LNG Marketing Corporation signed a 20-year sale agreement that gives Gazprom the exclusive rights to export LNG produced from the Tamar floating LNG plant, off Israel's Mediterranean coast. This deal implies that the LNG sea transport is the preferable solution versus the conventional pipelines, strengthening further the potential benefits of the Greek ship owners with exposure to the LNG sector.
Apart from being early movers in this emerging LNG transport market, Greek ship owners also equip their LNG tankers with the best available technology, which translates into Wärtsilä dual-fuel technology.
During the last 18 months Wärtsilä has been contracted to supply the main engines for 34 new 165.000 m3 LNG carrier vessels being built for GasLog, Maran Gas, Dynagas, Thenamaris, and Cardiff Marine, all Greek ship owners as shown above. Each of these LNG carriers will be powered by four Wärtsilä 50DF (dual-fuel) engines running on a diesel electric mode, with the capability of being operated on gas, diesel or heavy fuel oil (HFO). The number of engines counts 136.
Wärtsilä's advanced DF engine technology provides maximum operational flexibility, environmental sustainability, and redundancy, all of which are current priorities of the LNG sector. Wärtsilä first introduced the dual fuel electric machinery concept for LNG carriers in 2006. Wärtsilä already enjoys approximately 85% of the market for LNG vessel engines.
Shipping has contributed a lot in keeping the Greek economy afloat in a country that suffers from high unemployment and tough austerity measures currently. It is estimated that more than 250,000 persons depend on shipping activities in Greece, and the industry annually generates more than $33 billion. The country's shipping industry also looks to be well positioned to benefit from the emerging LNG transport market. This is why I believe that the shipping industry will most likely continue to contribute a lot, reviving the Greek economy for years to come.