Atlantic CEO remains optimistic despite competitive global outlook

Trinidad and Tobago’s LNG industry is facing a period of uncertainty in the short-term, but the long-term prospects of the industry remain very bright.

This was the overall assessment of Nigel Darlow, CEO of Atlantic — Trinidad’s one and only liquefied natural gas export facility — when the Energy Chamber sat down with him to discuss the outlook for the country’s major export commodity.

Unlike crude oil, there are big pricing differences among the four major gas markets of North America, South America, Europe and East Asia.

The Asian LNG market, by far the biggest market and dominated in particular by Japan, has seen major declines, with prices dropping by 50 percent over the past 12 months.

Darlow is quick to point out, however, that this decline has come off the back of record highs in early 2014, when Japanese spot prices were as high as US$20 per mmbtu.

European and North American markets have, by contrast, seen less of a decline, with Atlantic estimating 20 to 30 percent declines in the 2015 average price compared to 2014. (See graph)

Of greater significance to Trinidad and Tobago has been the large declines in South American LNG prices, which have come down about 40 percent since mid-2014.

This is especially important for Trinidad and Tobago, as South America is now the most significant market for Trinidad and Tobago’s gas exports, accounting for about half of the total export market.

This is a big turnaround from the 2000s, when almost all of our gas exports were destined for the U.S. (See chart)

On the demand side, Asia dominates the global LNG industry, with Japan alone accounting for 37 percent of the total market of 240 million tonnes per annum (mt).

While lots of people talk about the Chinese market, its demand remains at a relatively modest 20 mt, far behind Japan (89 mt), South Korea (38 mt) and Europe (33 mt).

The global supply of LNG has remained more or less flat since 2011, but there is a major new wave of production about to come onto the market, primarily from Australia and the U.S.

This year, there is a projected new 25 mt of LNG coming onstream and an additional 130 mt by the end of the decade, representing a 60 percent increase in supply between 2015 and 2020.

In a situation where demand remains soft, this new wave of supply looks likely to increase the volatility in LNG markets and represents short-term uncertainty for Trinidad and Tobago.

Darlow points out, however, that the industry has been here before. Between 2005 and 2011, global LNG supply doubled and all of this new supply was able to find a market.

In the longer-term, it is clear that demand for LNG will continue its long-term growth trajectory, with LNG growth rates predicted to increase at a compounded 5 percent per annum over the next decade.

Much of this new demand will likely come from China, where gas-fired power generation currently only accounts for 2 percent of total electricity production.

While Chinese government policies currently incentivise investment in coal-fired power generation, it is likely that a combination of local air-quality concerns in major cities and global greenhouse gas emission targets will see a shift toward gas. This could help spur demand for LNG in the world’s second-biggest economy.

Where does this uncertain short-term outlook leave Trinidad and Tobago? Darlow points out that Atlantic is well-placed to be able to go on profitably exporting gas even during low prices.

Because of the very competitive cost for construction of all four of the LNG trains, Atlantic is well-positioned to be able to compete in a low-price market: Atlantic construction costs came in at around US$250 per tonne of capacity compared to the more recent costs of up to US$1,500 per tonne incurred in Australia.

This gives Trinidad and Tobago a huge advantage and means that our LNG should be able to find profitable markets even in a more uncertain short-term future.

Our geographical position means that we are also well-placed to take advantage of the opening of the new Panama Canal next year, which will cut journey times and make our LNG more price-competitive in the Asian markets.  

The cost inflation that has hit the industry hard over the past decade and the current uncertain price environment is likely to delay investment decisions on new LNG projects over the next few years.

Darlow’s biggest concern is not the ability of Trinidad and Tobago to find profitable markets for our LNG, but rather the risks associated with the shortfall in gas production and the battering that our once-excellent reputation as a reliable supplier has taken over the past few years.

Darlow explains that what he hears repeatedly when he goes out to international gas industry meetings is that “Trinidad is running out of gas” or that “there is something wrong with your plant, your volumes are down.” He clarifies that there is nothing wrong with the plant, but we do have very significant gas supply problems.

This does not necessarily mean we are running out of gas, but we do need to get the right incentives in place to go after all the gas resources that we do have.

He points out that the recent announcements from the Minister of Energy indicates that there are a large number of small fields in Trinidad and Tobago that could be tapped to increase supply, but somehow the economics of these fields do not seem to add up in the current environment.

“What is counted as a small field in Trinidad would have been considered a reasonable find in the North Sea, back when I was working there,” he said.

The other possibility for increasing supply in the medium-term is the cross-border gas from the Loran Manatee field, and Darlow is encouraged by the recent progress that has been made.

Once supply issues are resolved, Darlow is confident that the Trinidad and Tobago LNG industry will have a very bright future for many decades to come.