Skip to main content

Kacharagadla Featured Article

The Five Characteristics of Successful Innovators

There is not much agreement about what makes an idea innovative, and what makes an innovative idea valuable. For example, discussions on whether the internet is a better invention than the wheel are more likely to reveal personal preferences than logical argumentation. Likewise, experts disagree on the type and level of innovation that is most beneficial for organizations. Somestudiessuggest that radical innovation (which does sound sexy) confers sustainable competitive advantages, butothersshow that “mild” innovation – think iPhone 5 rather than the original iPhone – is generally more effective, not least because it reduces market uncertainty. There is also inconclusive evidence on whether we should pay attention to consumers’ views, with somestudiesshowing that a customer focus is detrimental for innovation because it equates to playing catch-up, butothersarguing for it. Even Henry Ford’s famous quote on the subject – “if I had asked people what they wanted, they would have said fast…

The New Year Will Usher In More Pain for Asia-Pacific Gas Markets

What’s needed in the ever changing liquefied natural gas (LNG) market in the Asia-Pacific region is more demand to soak up a supply glut that has been on-going for over a year and will get even worse as the New Year starts and last until at least 2020, perhaps as far out as the mid 2020s.
To start with, the supply side of the equation: From a market that had somewhat limited supply in the aftermath of the March 2011 Fukushima nuclear disaster in Japan and that country’s increased procurement of the super-cooled fuel to make up for the eventual shut down of all of its 50 nuclear plants, and with prices breaching $20 per million British Thermal units (MMBtu) in the first part of 2014, markets have become seriously over-supplied. This stems from several factors.
First, the world’s top two LNG exporters, Japan and South Korea, respectively, have seen a slow down in LNG demand growth amid warmer temperatures during the last couple of winters in the Northern Hemisphere. Both countries are sitting on ample gas reserves and have cut back on gas procurements. China’s economic growth slowdown and its still preference for pipeline gas over LNG also puts downward pressure on Asian LNG demand.
A liquefied natural gas (LNG) tanker arrives at a gas storage station at Sodegaura city in Chiba prefecture, east of Tokyo on April 6, 2009 for the first shipment of LNG from Sakhalin-2 natural gas development project in Sakhalin, Russia. (Photo credit: STR/AFP/Getty Images)
In addition, since LNG prices in Asia are usually linked to oil-prices, the ongoing plunge in global oil prices from $115 a barrel in June 2014, todipping below $40 this week hitting multi-year lows, has also repressed LNG spot prices which are just over $7 per MMBtu for January delivery, with projections for prices to be in the mid-$6 MMBtu range in 2016, but it could actually get uglier than that.
These two factors would be enough to cause ample concern for LNG producers, particularly new projects that have only locked in long term contracts for part but not all of their production. It is even more troubling for projects proposals that will likely never become anything other than proposals due to pricing and correlated funding problems.
The Saudi Arabia of LNG
However, the swing factor in all of this is Australia. The Paris-basedInternational Energy Agency (IEA) said in its 2015 Medium-Term Gas Market Report earlier this year that a total of 164 billion cubic meters (bcm) of additional LNG export capacity will be operational globally by 2020, adding 40% to current levels. Australia will add 44% of that new supply. Australia currently has five LNG projects in operation, with five more either under construction or about to come on-stream. When plants under construction in Australia are added to current capacity, the country’s total output of 85.8 million tons will bypass that of current top exporter Qatar (77.7 million tons).
Unfortunately, Australia’s timing is horrific. These new projects were mostly proposed around 2010 when LNG was still a somewhat limited commodity, while visions of massive LNG profits must have been hard to quench. Also unfortunate for the Aussies, is the fact that none of these project developers seems to have considered what anybody else was up to in the country. In short, they all went ahead with their own LNG development plans, oblivious to the impending supply glut, and if you will, the doom and gloom that is now being cast over the market.
A lot of lessons can be learned from this, including calls for national energy plans not only in Australia, but also the US, another country that will see as many as five LNG projects operational before the end of the decade. Other projects in Angola, Malaysia, Indonesia, Mozambique, Iran and even Russia have to be factored into the supply equation, creating even more pain for producers.
Now, what lack of cohesive planning has failed to do, the market will have to sort out and the market will not be kind to producers. Yet, it will surely sort it out, but not before LNG prices plunge as low at $4 per MMBtu, perhaps breaching the $3 range for a time. Yet, like a medieval fable, a new LNG market will rise from the ashes. Buyers will become traders (including those with long term off-take agreements reselling cargoes on the spot market (something CNOOC has done and Sinopec will soon do). The development of the LNG spot market will mature and likely make up as much as a quarter of all LNG cargoes sold in Asia. Buyers will increasingly renegotiate long-term contracts for better pricing and more favorable terms and destination clauses, a development that is also starting to take place.
Enter the Singapore SLInG
Of course, in the middle of this massive industry shift is pragmatic Singapore, already a behemoth in oil trading and refining in Asia and it wants the same status in the LNG market. Earlier this week, Singapore Exchange Ltd., the city’s main market operator, said it is set to launch cash-settled futures and swaps contracts for LNG as early as January. New contracts will allow LNG traders to hedge the price for up to a year ahead. The contracts will be based on Singapore’s new LNG benchmark price – the Singapore SLInG.
If successful, Singapore can help LNG become traded more like crude oil, though of course LNG could never hope to match the cheer size and volume of global crude oil markets. Yet, the Singapore SLInG, named for the city state’s noted cocktail, could help quench the thirst of LNG buyers and traders hoping to make LNG markets more transparent.
The New Year will mark a shift in LNG markets and as one London-based analyst told me recently, it won’t be merely a market or cyclical change, it will be a structural change, from which there will be no turning back.

Comments