Demand growth spurs LNG projects says finance law firm

Amid rising demand for cleaner fossil fuels, increased energy consumption and continuing geopolitical concerns about stable oil supplies, liquefied natural gas (LNG) projects are likely to be especially active in 2004 and beyond, say lawyers at White & Case, one of the world’s leading project finance law firms. “Industry reports show that the use of natural gas in electric power production has increased almost 40 percent in the last decade in the United States, while domestic supply has declined by four percent. Faced with that economic reality, many of the world’s major energy companies see a huge opportunity to import LNG into the Americas, and there is strong demand growth in Europe as well,” said Troy Alexander, co-head of White & Case’s Energy, Infrastructure and Project Finance group.

The Firm’s LNG specialists say that, among the key trends that are emerging, the following bear watching in the year ahead:
* Rising demand will create a large appetite in the LNG sector for new capital investment in production, transportation and terminal infrastructure;
* Divergent regulatory approaches between major jurisdictions such as the United States and European Union may pull the industry in different directions;
* Efforts to reduce flare-off of gas at the well-head both for environmental and economic reasons will be a factor in increasing LNG supply;
* The geography of global LNG demand is shifting away from its traditional North Asian epicenter, due to the strong demand growth in North America and Europe, and the emergence of India and China as LNG buyers; *The extent to which the UK becomes a net importer of gas. The LNG chain requires the development of vast, capital-intensive infrastructure, including new receiving terminals, specialized LNG ships, and securing LNG supplies from sellers with access to large gas reserves and gas and LNG production facilities.

A typical LNG receiving terminal would have a send-out capacity of one billion cubic feet per day of gas, at a construction cost of around $500 million to $1 billion. Shipping requirements to fill this capacity may involve five to 10 vessels at a cost per vessel of around $175 million, while an upstream gas production/liquefaction complex would cost anywhere between $2 billion and $10 billion depending on size and location. Leading energy analyst Daniel Yergin estimates in a recent Foreign Affairs article that it will cost as much as $200 billion worldwide for LNG to reach its full potential). Alexander said that the changing economics of LNG, in conjunction with technical advances, are making the huge investments that are required more attractive. “While the investment costs seem high, recent improvements in engineering and construction have considerably reduced the cost per BTU delivered. And given the alternatives-opting for less clean-burning fuels or relying on very limited domestic gas resources — the number of LNG projects serving the United States will increase,” said Alexander.

But recognizing that LNG can help the US meet its ever increasing demand for electricity, FERC is now revising its rules to allow terminal owners and operators more freedom as to who has access and at what cost. This should help stimulate capital investment in LNG projects. In Europe, however, the opposite is taking place. “Noting the rise in LNG projects, the European Union has enacted a new directive which will take effect this year that will mandate third party access to such terminals, absent an exemption,” said Philip Stopford, a London partner who heads White & Case’s Project Finance practice in Europe. “These divergent regulations may well have ripple effects on the global LNG marketplace.” Monetisation of Natural Gas Benefits Environment Stopford added that another trend to watch is the monetisation of gas, especially in the Middle East and Africa. Until recently, many countries have flared off excess natural gas extracted as a byproduct of crude oil extraction. Now, however, oil companies are trying to capture the economic value of this gas, and often LNG is the only real option.

This trend is being encouraged because of the environmental consequences of flaring. Change in Asia The emerging LNG demand in the Americas also affects Asian LNG buyers and the producers serving those buyers. North Asian buyers have been consuming about 70 percent of global LNG production, but this is poised to change. “Demand pull from the West, and the emergence of China and India as LNG buyers, is changing Asian market attitudes,” said Hendrik Gordenker, a White & Case partner who heads an LNG practice group in Tokyo. “The emerging projects raise of number challenging commercial, operational and financing issues, which we are involved in solving. At the same time established LNG players are actively pursuing strategies, such as new contracting approaches and investing midstream and upstream, to create new opportunities out of the changing environment.”