The role of LNG in a global gas market

Linda Cook Executive Director Gas & Power Royal Dutch Shell plc

Oil & Money Conference, London 21st September 2005

Linda Cook is Executive Director Gas & Power of Royal Dutch Shell plc. Her other responsibilities are Renewables, Hydrogen and Carbon Dioxide; Shell Global Solutions; Group Research; East Asia and Australasia. She was born in Kansas City, Kansas, in 1958 and joined Shell after graduating in Petroleum Engineering from the University of Kansas. She has worked for Shell companies in the United States, the Netherlands, and Canada. Before becoming a Group Managing Director, Linda Cook had been President and Chief Executive Officer of Shell Canada Limited since August 2003. Prior to that she has been Chief Executive Officer of Shell Gas & Power since 2000. She is a member of the Society of Petroleum Engineers and a Director of the Boeing Company.

Linda Cook: The role of LNG in a global gas market Global demand for natural gas may double by 2030, with LNG growing perhaps fivefold – driven by continued cost reduction. Despite the capital intensity of LNG projects and the complexity of the value chain, LNG supply capacity is increasing rapidly. Existing schemes are being expanded and many greenfield projects are moving ahead. Although the spot market for LNG is growing, new projects continue to be underpinned by long-term sales contracts. Competition for supplies is increasing price connectivity between regions. Seizing the opportunities of this exciting business requires the ability both to develop gas supplies and liquefaction capacity, and also to connect this to emerging and premium markets.

Thanks to the organisers for inviting me to join you today. I think the fact that a conference entitled ‘Oil and Money’ has devoted a session to natural gas underlines the growing role gas is playing in the energy business. And perhaps next year the organisers might feel inclined to go a little further and rename this event ‘Oil, Gas and Money’. We in the natural gas business don’t tend to dominate the headlines in the same way as our colleagues in the oil sector, but we are becoming just as vital in meeting the world’s growing demand for energy. The development of the gas business in the past thirty years has been dramatic. Global demand has tripled and the International Energy Agency is predicting a further doubling in the next thirty years. That means gas will be supplying a quarter of our energy needs by 2030. Within the gas sector, LNG is playing an ever increasing role. Like all natural gas, LNG is cleaner than coal or oil, and it offers an opportunity to diversify energy supplies. The decreasing cost of LNG is making it more competitive in more markets and, at a time of heightened concern about political instability, it can also be a more attractive option than international pipelines that cross multiple borders. As a result, LNG demand is forecast to grow more quickly than for gas in general, at about 10% a year over the next ten years. For these reasons, I will focus my comments today on the particular way

global gas consumption (bcf/d)
400 LNG 300 regional pipelines 200

LNG demand growth 10% pa

100

domestic

0 2005 2015

LNG is changing the dynamics of the global gas market.
The changing LNG industry

Figure 1: Growing demand for natural gas
(Cedigaz, BP, Shell)

Today’s LNG industry is very different from that of the 1990s. In 1990, there were nine LNG production sites with just 13 trains. Eight countries imported 56 million tonnes of LNG, with Japan accounting for two thirds. Last year there were fifteen LNG production sites with 66 trains, supplying 14 importing countries with over 130 million tonnes. Japan was still the largest importer but its share of the market declined to about 40%. And LNG accounted for 7% of the world’s natural gas demand. But this is just the beginning. The IEA forecasts that liquefaction capacity will increase fivefold by 2030. That

“The decreasing cost of LNG is making it more competitive in more markets.”

1

Linda Cook: The role of LNG in a global gas market
$ per tonne of annual capacity
800 700 600 500 400 300 200 100 0 mid 1990s 2002 2010 2030 regasification shipping liquefaction

Cost estimates for a 5 mtpa train

upstream $1 billion

liquefaction $1.25 billion

shipping $0.9 billion regasification $0.6 billion

Figure 2: Reducing unit costs for new LNG projects (IEA) means about a hundred new trains. Importing countries will need to build about 700 mtpa of regasification capacity. And the world’s LNG shipping fleet will need to increase from 179 operational ships to 600. We can see those increases are already well underway. New liquefaction capacity to supply about 70 million tonnes a year is under construction; a record 69 ships were ordered last year; and many more potential projects have been identified. I think all this activity underlines that investors and project developers have real confidence that the LNG market is going to continue to grow. This increase in production has been enabled by a significant reduction in LNG unit costs. (Figure 2) The IEA’s analysis shows that total capital costs for new LNG projects will decrease by about 40% from the mid 1990s to 2010 – with the greatest cost reductions being seen in projects to expand existing facilities and to build larger trains. While liquefaction costs have been systematically reduced over the past 20 years through the introduction of newer and more efficient trains, the more recent improvement has come through the increase in ship capacity – an increase of the order of 30% when 200,000 cubic metre ships come into service.

Figure 3: Still a capital intensive business
(Deutsche Bank)

Combined, these developments make LNG viable over longer distances than ever before. However, despite the reductions in costs LNG projects remain very capital intensive. While costs vary significantly between projects, Deutsche Bank suggest that total capital investment – including upstream, liquefaction, shipping and regas costs – for an integrated 5 mtpa LNG project is about $3.7 billion. (Figure 3) And the Qatargas II project, which includes two 8 mtpa trains, will cost in the order of $13 billion. Due to the high upfront investment required, making new LNG project decisions is far from straightforward – even with the high price of natural gas in most markets today – because of the complexity of the value chain. The discovery and development of the upstream resources may not be concurrent with target market development and customer demand, or with securing financing. That means, in order to move forward in this dynamic market, LNG developers need high level strategic and commercial skills to manage and mitigate the inherent risks.
Meeting LNG challenges

The volume of projects being undertaken by Shell and others reflects confidence that these challenges can be overcome. Let me just give you one

“In order to move forward in this dynamic market, LNG developers need very high level strategic and commercial skills to manage and mitigate the inherent risks.”

2

Linda Cook: The role of LNG in a global gas market example from Shell’s portfolio. The first three LNG trains in Nigeria started operation between 2000 and 2002 supplying European customers. Based upon the growing potential demand in North America – and facilitated by Shell import capacity – construction began on trains 4 and 5 in 2003. Then last year we began building a sixth train to supply the Altamira terminal in Mexico. And designs for trains 7 and 8 are maturing. (Figure 4) This is a very rapid pace of development by any measure, in response to growing and changing market demand. The project was also successful in attracting financing. Trains 4 and 5 were 50% third party financed, which involved raising $1 billion and is one of the biggest ever such finance deals in any industry in Africa. Nigeria is but one example of the rapid growth in the world’s LNG sector. Almost every existing project that can be expanded is being expanded and many greenfield projects are moving ahead – including in Egypt, Russia, and possibly someday in Iran. The result of all this is clearly a globalising industry where a more diverse range of producers will supply a more diverse range of customers with more gas.
The impact of globalisation

NLNG capacity mtpa 20

North America Europe

15

10

5

0 2000 2002 2005 2007

So what are the implications of a globalising LNG sector on the global natural gas market? We all know the ‘frequently asked questions’ in this respect. Will a material spot market for LNG develop? What impact will increasing amounts of LNG to North America have on the Asia Pacific market? Will we see the emergence of a global natural gas price like we have for oil? Clearly we are seeing greater flexibility in the LNG market. In 1992, the LNG spot market was approximately 1% of total sales. Last year that rose to just over 10%. So, the logical question is whether this is a trend that will continue, with spot or short term sales becoming the

dominant form of trading. Figure 4: Nigeria My answer is, ‘Not so fast’. Why not? LNG – rapid Because new LNG projects, as I mentioned before, continue to be very capital development to intensive, because they typically require meet growing third party financing, and because tradidemand tional customers continue to value long term contracts for security of supply. As a result, new LNG projects continue to move forward underpinned by a high proportion of their capacity committed under 15 to 25 year sales contracts to firm customers. That’s not to say that the market is not changing. As international trade in LNG continues to increase dramatically over the coming years, we will undoubtedly see many new, creative and complex swaps to optimise shipping and meet changing needs. And we are already seeing a shift in the traditional Japanese customers as the Asian LNG market tightens and they recognise they now must compete with markets on the west coast of North America. And so, while I do not believe we will “New LNG see the emergence of a global gas price projects continue to in the near future, there is already global move forward competition for spot cargos – and no underpinned by a doubt increasing connectivity of prices high proportion of between regions. their capacity So, who are the winners in this committed under 15 exciting sector? to 25 year sales Clearly, access to significant gas contracts to firm reserves is critical, ideally large deposits that can underpin major LNG plants customers.”

3

Linda Cook: The role of LNG in a global gas market that can be expanded over and over as demand grows. Obviously, the major natural gas resource holders such as Nigeria, Russia and Qatar have a lot to gain. But reserves alone are not sufficient. Winners will be those who are not only able to develop the upstream gas and liquefaction capacity, but can also connect gas supplies to emerging and premium markets – markets such as the east and west coasts of North America as well as, in the longer term, China and India. All of this takes capital, as well as a portfolio of global skills to pull it all together – technical skills, experience, a strong safety track record, shipping expertise, project management, marketing and project financing. So, the global natural gas sector has a bright future in particular for those involved in LNG. Demand for our product is rising – and rising fast. And that growth – combined with the fact that our industry is still at a relatively early stage of development – means there are going to be

1990

56 mt
(4% global gas)

2004

131 mt
(7%)

Europe

2020
Americas Asia

460 mt
(15%)

many new business opportunities ahead. The challenge for us is to make sure we have the skills and projects in place to seize those opportunities and respond flexibly to the rapid changes inherent in the transition to a global market. If we succeed in meeting those challenges then maybe one day soon it will be the global gas industry that dominates the headlines.

Figure 5: Growing global LNG demand
(Cedigaz, BP, Shell)

“All of this takes capital, as well as a portfolio of global skills to pull it all together – technical skills, experience, a strong safety track record, shipping expertise, project management, marketing and project financing.”

4

Recent speeches by Group Managing Directors and other senior executives Recent speeches by Executive Directors

Investing in uncertainty - the Partners inof meeting expanding energy demand challenge Progress

Jeroen vanBrinded Malcolm der Veer

Oil market challenges in the energy we need Asia Investing to secure the Middle East and

● ● ●

Malcolm Brinded Paul Skinner

The role of the private of Europe’s strengths Making the most sector in changing Africa

Jeroen vanRoels Harry der Veer

Prospects good, challenges great – the trust of the oil and gas industry Security in state

Meeting Asian energy needs in the 21st century Jeroen van der Veer

● Diversity and balance – keys to meeting China’s energy challenges Present thoughts, future facts Linda Cook ● What is the international oil company of the future going to look like? Building connections, meeting challenges, enabling progress Jeroen van der Veer ● The vital importance of Russia in the world’s energy future Integrating technology to Brinded Malcolm meet energy challenges ● Delivering downstream profitability in changing markets Requirements, responsibilities and relationships Rob Routs
This publication is one of a range published by Malcolm Brinded Group External Affairs, SI, Shell Centre, London SE1 7NA, England. ● For further copies, and for details of other titles available in English or as translations, Seeking opportunities in the future fuels market please contact the External Affairs department of your local Shell company. Rob Routs Alternatively, write to the above address or ● fax +44 (0)20 7934 5555 quoting department reference PXXC, This publication is one of a range published by or telephone +44 (0)20 7934 5638. Group External the Royal Shell Centre, London Companies, including Information about Affairs, SI,Dutch/Shell Group of SE1 7NA, England. For further copies, and for detailsof varioustitles available can be accessed at: downloadable versions of other publications, in English or as translations, www.shell.com please contact the External Affairs department of your local Shell company. Alternatively write to the above address, fax +44 (0)20 7934 5555 (reference PXXC), or telephone +44 (0)20 7934 5638. Information about the Royal Dutch/Shell Group of Companies, including downloadable versions of various publications, can be accessed at:
© Shell International Limited (SI), 2001. Permission should be sought from SI before any part of this publication is reproduced, stored in a retrieval system, or transmitted by any other means. Agreement will normally be given, provided that the source is acknowledged. The companies in which Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company, p.l.c., directly or indirectly own investments are separate and distinct entities. In this publication the expressions ‘Royal Dutch/Shell Group’ and ‘Group’ are used to refer to the companies of the Royal Dutch/Shell Group as a whole. The words ‘Shell’, ‘we’, ‘us’ and ‘our’ are used in Shell International Limited Group and in others to an individual Shell company or companies where no particular purpose is served © some places to refer to the (SI), 2005 Permission should be sought from SI before any part of this publication is reproduced, stored by identifying Agreement will normally be given, in a retrieval system, or transmitted by any other means.the specific company or companies.provided that the source is acknowledged. The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate entities. In this publication the expressions “Shell”, “Group” and “Shell Group” are sometimes used for convenience where references are made to Group companies in general. Likewise, the words “we”, “us” and “our” are also used to refer to Group companies in general or those who work for them. These expressions are also used where there is no purpose in identifying specific companies.

Phil ● Watts

Jeroen van der Veer ● Mark Moody-Stuart ● Phil ● Watts

● Leadership and partnership –imperatives for offshore safety

Jeroen van der Veer ●

www.shell.com/speeches