April 28, 2016
U.S. LNG Exports and European Energy Security Conference: Global Gas Market Developments and U.S. LNG Exports
U.S. LNG Exports and European Energy Security Conference
Global Gas Market Developments and U.S. LNG Exports
Richard L. Morningstar,
Founding Director and Chairman, Global Energy Center,
Director, Eurasian Energy Futures Initiative,
Principal Deputy Assistant Secretary, Office of International Affairs,
U.S. Department of Energy
Vice President of Strategy,
Martin J. Durbin,
Executive Director, Market Development,
American Petroleum Institute
Senior Research Fellow, Center for Strategic Studies,
Under the President of the Republic of Azerbaijan
Senior Fellow, Global Energy Center,
The Wall Street Journal
Location: Atlantic Council, Washington, D.C.
Time: 3:15 p.m. EDT
Date: Thursday, April 28, 2016
Superior Transcriptions LLC
RICHARD L. MORNINGSTAR: I’m going to turn things back over to David Koranyi in a moment. I just want to – I was going to admonish the crowd, not for the need to get you back in your seats, but until Dana Marshall finally asked a question at the end of the last session, despite the fact that there were about 120 people at the session, there were no questions from the audience. And we’ve never had such a shy audience at any of these events. So I hope that there will be a lot of questions after this summit.
And what happened to David? There you are. Back to you.
DAVID KORANYI: Thanks, Dick. I think it was the after-lunch slump and probably we also have to make coffee here at the Atlantic Council stronger going forward. But I’m hoping that this will be a livelier Q&A session after this session.
It’s my pleasure to welcome you back. This is the second session of today’s conference. This is on global gas market developments and U.S. LNG exports.
Let me just flag a couple of reports that the Atlantic Council put out in the last couple of months on the very issues that we already touched upon in the first panel, and some of those reports will be available or are available outside to pick up copies. We issued a good report on Nord Stream 2, written by Alan Riley, who is a nonresident senior fellow at the Atlantic Council’s Global Energy Center. We had another one, written by John Roberts, who is going to be the moderator of the third session, on Turkish Stream. There was one – and this topic came up repeatedly in the first session – on Ukrainian energy sector reform, which we actually launched about a week ago, by Anders Aslund, is an excellent report. And there was finally – and this is, of course, a great segue to this panel – we had a major report that we published in February by our very own resident senior fellow Bud Coote, who wrote an excellent and really, really thorough report on U.S. energy exports and the international LNG markets.
So the first panel, I think, did a really, really good job in talking about the foreign policy, national security, European energy security aspects, and, of course, the U.S. connection. This panel is going to be more on U.S. LNG exports per se, both from a political, regulatory but also from a commercial perspective, and then how it ties into global gas market developments, and global liquefied natural gas market developments in particular.
So this is again an excellent lineup. Our moderator today is Amy Harder. She’s following these issues very closely as the energy and environment correspondent of The Wall Street Journal. She is also a terrific moderator. She moderated multiple sessions already here at the Atlantic Council. So thanks, Amy, for doing this.
We have Paula Gant, who is the principal deputy assistant secretary at the Office of International Affairs at U.S. Department of Energy; Andrew Walker, who is the vice president of strategy, or for strategy, at Cheniere Energy. And Cheniere, of course – if we would make, like, a word count today in terms of what’s the most mentioned expression during the conference, I think it would be Cheniere.
ANDREW WALKER: We’ll take it.
MR. KORANYI: And we have Martin J. Durbin, who is the executive vice president at the American Petroleum Institute. And we have Gulmira Rzayeva, who is a senior research fellow at the Center for Strategic Studies under the President of the Republic of Azerbaijan, and a great expert on European energy security and Caspian energy issues. And, of course, Bud Coote, whom I already mentioned, who is going to talk about his report and his findings.
So without further ado, Amy, the floor is yours.
AMY HARDER: Well, thank you, David.
Good afternoon, everybody. Can you hear me okay? I’m going to hope that you guys stay awake, and in one attempt to do that, I might ask you a couple of questions – you, the audience – and it will be semi-anonymous, in that you can raise your hand if you want to answer the question, and they will be very unofficial. So that will make sure that you guys can stay awake.
So just a quick rundown of how this will go through. I’m going to allow each of them to talk about five minutes about their specialty in this area, and then I’ll go for some questions with the panel, and then I will turn it to you guys for some questions for the panelists as well.
Well, our topic is the global gas market developments and U.S. LNG exports. There’s certainly no shortage of things to talk about; namely, the fact that there is no shortage of natural gas, a complete turnaround from a decade ago. So I will just kick into the comments from each of them.
And Bud, will you start?
BUD COOTE: Yes. Thank you.
Well, unlike shale oil production in the United States, which has begun a decline, shale gas production is still going strong. It’s begun to level off, but total gas production in the United States continues to climb. It set a new record last year, and the Energy Information Administration expects it to best that record this year and again in 2017.
This is adding to the global supply of gas and LNG and is already having an impact on Europe and other importers. It’s lowered the price of natural gas in most markets. It’s continuing to unify those regional markets into one global market. And it’s also introduced more flexible contract terms that are helping importers negotiate prices with other gas suppliers. Over the longer term, this is going to continue to diminish the prevalence of gas index or oil index prices in the gas market.
Looking at other activity, in 2015 we saw a total of 34 LNG importers. China increased its gas – its LNG imports by 5 ½ percent. Globally, LNG trade was up 2 ½ percent. The countries with the largest percentage increases of imports included Egypt, Jordan, the U.K. and Thailand. As far as new contracts are concerned, there were 24 new contracts reported signed. A number included U.S. companies, but interestingly, Japanese utilities signed a total of seven new LNG import contracts.
We also had Gazprom signing a couple of gas purchase contracts, and actually five new export contracts involved Russian companies. So this looks like a clear indication that Russia intends to be a major player or significant player in global LNG trade.
That brings up the question of how Gazprom, in particular, is going to react to the increasing availability of U.S. LNG and whether it’s going to try to keep it out of the European market by lowering pipeline prices. I’d say in the near term, in the next two years, there’s not going to be a whole lot of U.S. LNG available to compete with Russian gas. The Russians are exporting about 130 bcm to Europe last year, and the amount of LNG coming out of the U.S. will be a fairly small fraction of that. So it would cost Gazprom a lot of money or a large volume of gas to keep out a relatively small amount of U.S. LNG.
At the same time, we can see what the large impact can be of just a small amount of LNG. The experiences of Lithuania and Poland show us that. In Europe, you don’t get the lowest price for Russian pipeline gas unless you have access to alternatives, and we see continuing expansion of infrastructure in Europe. And I don’t want to impinge on the next panel’s discussion, but in particular, one recently funded project to upgrade the part of the pipeline network in Western Romania, beginning in Bulgaria and extending up through Hungary and Austria, was approved by the EU in January and heavily funded. Out of 15 projects, it has the bulk of the money going to it because it’s actual work. And it’s listed under the Southern Corridor, so this part of the pipeline system will be upgraded to be able to accommodate gas moving from south to north. And that could handle, as well as gas from the Southern Corridor, gas from expanded LNG capacity if it is added to the southern coast of Europe.
MS. HARDER: Great.
Now Andrew, why don’t you give us Cheniere’s perspective?
ANDREW WALKER: Thank you, Amy. First, let me just say thank you to the Atlantic Council for inviting Cheniere to contribute to the discussion. Always a pleasure to be here amongst our friends. Anything that you’re overseeing, Ambassador Morningstar, I’m in. So it’s great to be here.
You said earlier – actually, I think it was David said earlier Cheniere’s had a high word count this week. That’s good, great from the Cheniere perspective, but actually, I think it is actually warranted because I think we are at a pivotal moment in the kind of energy narrative. We will look back in years to come and say, OK, 2006 was kind of the start of the change, a really quite fundamental change in the global gas market.
And really the global gas market is my area of expertise, and that’s what I’m going to give you a few thoughts on, although I will start by saying, yes, Cheniere has sent out seven cargoes. The first went out on the 24th of February. We have sent those cargoes out to a range of markets – South America; the Middle East; Asia, if you count India as Asia, which I do; and, indeed, Europe. It wasn’t the cargo that left the berth on Monday, for those of you who were here at the party. As has been said, that was going somewhere else, but the one before went to and arrived in Portugal on Wednesday morning.
So the link has been made between the U.S. and Europe, but also, I think importantly, between the U.S. and many other markets. Already we’re seeing the global marketplace in play, U.S. sending cargoes out to a wide range of players.
Why do I believe this is a momentous event in terms of the global gas market? Well, I’ll give you four reasons and then I’ll give you three tangible effects, and I’ll see if I can do that in my allotted time, Amy.
Firstly, the U.S. is making LNG abundant. Now, that kind of sounds obvious – in fact, it is obvious – but actually, it’s kind of overlooked in the scheme of things. There’s a reason why LNG hasn’t been abundant through most of its 50 years, and that’s because it’s come from countries that were centrally controlled by governments or national oil companies that controlled the exports. So you did not have multiple LNG projects competing to export the national resource. Companies did not allow it to happen. So generally, that put a constraint on LNG supplies over the first four decades, certainly, and supply and demand kind of moved together in lockstep, bilateral trade, but you didn’t get an abundance. And in fact, when demand got ahead of supply, you would find rather the opposite. It was an industry that was prone to shortage, as we saw from 2011 through to the present.
Australia and the U.S. are the two main waves that are happening at the moment, and those are both countries that have allowed the construction of multiple projects competing against each other with multiple trains. It kind of sounds obvious, but a lot of people miss that. That’s why we have LNG abundance. Even more so in the U.S., the model has changed because the U.S. is looking at LNG projects as infrastructure. Multiple – there’s a clear process in place, thanks to the government, that allows you to go through the permitting. If you can go through the permitting and show that you can do it safely within the legal requirements, then you can progress and put an LNG project in place.
That is really kind of the free-trade principle in action that you don’t see in previous supplies, and that’s why LNG has become abundant. That is why the buyers – I can see some of the buyers out there are looking a lot happier now with low prices and abundant gas coming than they have in the past.
The U.S. is not only going to make gas abundant. Abundance on its own doesn’t change things. You actually need cost-competitive supply, low-cost supply, and the U.S. has a lot of cheap gas. It’s replenished its gas supply with the shale gas revolution, 800 Tcf available or could be produced at $3 or less.
You can also build LNG infrastructure in the U.S. pretty much more cheaply than anywhere else, $500 per ton per annum. It has cost people three times that to build in Australia. Low-cost gas, low-cost infrastructure, that’s a hard combination to beat.
Abundance. The U.S. is going to be a price setter for the future. We’ve gone from an industry that’s constrained to an industry where you have abundance of supply with a transparent price. That competition means if we’re not prepared – we Cheniere are not prepared to supply at Henry Hub plus cost, plus shipping cost, somebody else will. And that’s going to put a lid on prices. And that’s ultimately good for the consumer, a more competitive global marketplace.
Also, it doesn’t just stop there. The U.S. is putting destination-free volumes into the marketplace. We’ve released some of the constraints that have been typical in the industry, destination constraints that have meant buyers have been constrained in terms of the flexibility of how they can use the volumes, the U.S. is destination-free LNG, and that’s going to make the system much more flexible, as a result, much more responsive, much more resilient.
And actually, it’s going to increase liquidity, as well. Abundance plus flexibility will equal liquidity, and that will be a real change in the industry. The LNG industry is pretty illiquid, certainly in the prompt; it’s very different from the oil industry. But we are heading towards a more commoditized nature. I don’t think we’re going to see the industry suddenly become commoditized tomorrow, but we are certainly on that journey. And that’s the journey that the U.S. is kind of moving us along in terms of the global gas markets. And that’s good. That’s good for gas because it means the industry is listening much more to what the buyers want. It’s a more resilient, responsive marketplace. It’s a more cost-competitive marketplace.
I think the industry has been through a period of five years of tightness that have resulted in gas prices in Asia hitting 19 bucks during the winter, and I think we have kind of felt some of the impacts of that where we’ve seen LNG kind of lose its – I won’t say credibility, but its position in terms of the buyers thinking in terms of market share as they look at their fuel options.
You have to be competitive. If you’re a seller, you have to be attractive to your customers. The U.S. is making LNG attractive to customers once again.
So my three tangible impacts – and again, I’m sure we’ll discuss some of these. U.S. exports are lowering fuel bills tangibly in Europe and Asia. You can do the math. People are going to pay less for their gas. They are incentivizing.
The abundance, the accessibility that’s going to come with this period of abundant supply is going to allow new markets to open, existing markets to grow, you know. We at Cheniere truly believe that. We’re working on new markets. Bud talked about some of the new markets that emerged in 2015. The two largest growth importers in 2015 were Pakistan and Jordan. Neither of those imported anything in 2014. They were new markets that emerged. We’re going to see many more of those come, some in Eastern Europe.
And then finally, finally we’re going to see a reduction – the competitive marketplace – and, you know, market economics says that competition is good – is going to reduce the leverage of suppliers where diversity is low. Obviously, with the European discussion point here, Russia comes to the forefront, but there are other places that don’t have a wide energy diversity in terms of access to indigenous resources. There are other places that do have low diversity of supply as well. So it’s going to help not just Europe, but other markets, in terms of reducing the leverage of the more monopolistic suppliers.
So that’s my probably six minutes of comments, Amy.
MS. HARDER: That’s OK. You can go over a few seconds.
Now, Marty, can you give us the U.S. oil and gas industry’s perspective?
MARTIN DURBIN: Sure. Well, thank you, Amy, and thanks to the Atlantic Council.
Just building on some of the comments we’ve already heard, I really want to focus on how significant this time is right now in looking at U.S. global energy policy. I know many of us, as we were planning events this week – you know, the Atlantic Council, and there was the, of course, Cheniere celebration down at Sabine Pass, and we had an event at Rice University earlier this week – I wish we could all say we knew exactly everything that was happening in this time and we made it happen during this time, but we didn’t. But the fact is we’re now – we’re referring to this as Energy Export Week in 2016.
But look at what’s happened in a very short time here. You had the Senate energy bill pass, so we spent months trying to figure out whether that thing was ever going to move; now we’ve got it. We have a House bill, they can go to conference, and this bill happens to have a provision that would help accelerate even further the approval process for LNG export facilities. Just yesterday the House Armed Services Committee approved the defense authorization bill, which is a must-pass bill. So it will get passed. And in the bill is an amendment that essentially takes that provision from the House, again, accelerating the Department of Energy process to move things along.
But more realistically, we had – you know, as Fred Hutchison of LNG Allies was saying, just in the last 67 days we’ve seen the first shipment of crude oil in the United States in over 40 years, come back to the significance of actually getting that lifted last year, had the first shipment out of Sabine Pass of LNG, of course, and now we’ve had seven shipments out; and natural gas liquids, as well, separated from gas in Western Pennsylvania make its way to Philadelphia at Marcus Hook, and was shipped to INEOS in Norway. I mean, that’s a significant change in what the U.S. posture has been for being able to export energy in a very short period.
And it follows on the fact that, you know, 10 years ago, I don’t think there was anybody in this room that was making the predictions about where we would be on natural gas and oil production here in the United States. The fact that we are now the world’s largest producer of oil and natural gas, there was nobody predicting that. That happened very quickly, and now we’ve seen policy move very quickly as well.
I talked about the crude oil export ban. I will count myself among those who last summer were thinking, yeah, that’s probably not going to get done, but let’s see where it goes. And sure enough, you know, we had some real leaders on the Hill and elsewhere that kept a very singular focus here.
And I mentioned before that success has a lot of fathers, but I do want to say, for those in the room here, the engagement of the embassies and the countries of Central and Eastern Europe were really significant in this debate, both on crude oil and for LNG exports. You know, your voice at a time when the issue of geopolitics became much more front and center, I think it became a much more important piece of the debate in Congress, within the administration. Having embassies willing to really engage at the Department of State, at the White House, on the Hill – again, it added a critical voice. And while there were, again, a lot of people who had a lot to do with making that happen, I don’t want to minimize the role that the diplomatic community played here.
So as we look forward, the fact is we are seeing, you know, continued development of these LNG export facilities despite the fact that we’ve seen prices stay very low, and with oil prices low, as well. Let’s not forget that most of these facilities are not worried about what the price is going to be tomorrow or next year. These are 20- and 30-year contracts, and you’re really planning out for quite a long time.
I do, though – and there’s plenty to celebrate here, but I do want to add one note of caution. While I know the next panel is going to talk about the need for integrating infrastructure in Europe, I think we’ve got to be very careful and make sure we’re doing what needs to be done here in the United States from an infrastructure standpoint. And I say that because while we do have a robust transmission pipeline system in the United States, but again, with the enormous increase in production, the opportunity we have now not only in the export market but with our power generation, we’re going to continue to see natural gas play a bigger role in power generation, industrial uses and even in transportation. What we are seeing, unfortunately, is that – now, Amy and I promised we weren’t going to talk about Keystone, but –
MS. HARDER: Too late. You already mentioned it.
MR. DURBIN: Too late. But what we’re seeing is now every gas pipeline project out there is being treated in the same way that Keystone was: It is a make or break – you know, it can’t be produced safely; there is no safe pipeline; it’s going to poison our air and water. I mean, none of those things are true, but I do have to say it is going to take a concerted effort, not only inside of industry but all of those who are going to be benefiting from this – and I don’t mean this in a really negative way, but I think the White House and the administration have got to play a stronger role in the messaging here.
I’m not looking for them to be cheerleaders for the industry or any particular pipeline project, but as we’ve heard from Department of State, we’ve heard from DOE – I mean, Chris Smith and Robin were both at the events earlier this week, and Paul and I have talked about this a lot – they can very easily point to all the benefits that we have from natural gas playing a larger role, not only in the export side from an economic standpoint, but the geopolitics – you know, reducing emissions – but if we don’t have the infrastructure here in the U.S. to be able to feed all of that, it’s really going to restrain our ability to do that.
Now, I will quickly say – and Andrew talked briefly about it – I think the federal process for pipeline approval is relatively very certain and I think people are comfortable with it. That’s not a problem. But where we’re having, you know, issues where states now have a role, whether it’s intrastate or they have a delegated authority. I for one would say that the White House, the administration, needs to be playing a stronger role in their messaging to let people know that, look, we will make sure the pipelines are built safely, we’ll make sure that the natural gas is produced safely, but we have to have this infrastructure in order to achieve and realize all the benefits from an economic growth standpoint, from an emission reduction standpoint, and to continue to grow on the U.S. role as a global energy leader.
So I will leave it at that.
MS. HARDER: I continue to be surprised that the first shipment of oil exported from the U.S. surpassed that of LNG, I think by a month or two. So I don’t know what that – I guess that just shows the power of a grand bargain on Capitol Hill that I don’t think we’ll see again for a very long time on these issues.
Paula, I want to turn to you to get the government’s perspective on all these issues.
PAULA GANT: Thank you, Amy. Thank you, Ambassador Morningstar and David, for having us here today.
And I think that oil outpacing natural gas exports just proves the weak power of all of our own productions, right? (Laughs.) You never can predict what might happen in the world of energy abundance that we’re seeing, particularly here in the United States. And I’m going to talk a little bit about how we’re seeing that impact the dialogue we’re having with other countries, which reflects the commercial dialogue that many of you in the room are having with companies like Cheniere, that it’s radically different from the types of commercial and geopolitical dialogues we’ve had about energy supply certainly for the duration of my career.
And my son Mason is here, and I like to say that many of the lessons I’ve learned today in my career will not be relevant to him, because this generation is dealing with an incredible era of abundance and asking the questions that abundance presents. Whether it’s oil and natural gas or renewables and energy efficiency, this abundance that Andrew has noted, and Marty, is really reshaping our thinking of how we use energy, how we move energy, and how we share that understanding and that abundant resource, those resources, with our partners and our allies.
So I want to talk a little bit about a couple of places that those multilateral dialogues are happening between the U.S. government and our partners and beginning to reshape our concept of energy security from one that has historically been about oil supplies and oil stocks to one that’s increasingly thinking about the role that natural gas supplies and storage plays, as well as energy efficiency and renewable energy, as well as the role that greenhouse gas – reducing greenhouse gas emissions plays in securing our climate objectives, which also relate to energy security and national security.
These themes are going to be addressed on Monday and Tuesday in Kitakyushu, Japan, where Secretary Moniz and other G-7 ministers will meet for the G-7 Energy Ministerial, which itself was created by the G-7 leaders following Russia’s intervention into the Ukraine, and for the sole purpose of coming together to develop a more modern concept of energy security and a fundamental understanding that G-7 members’ national security is directly related to our respective and mutual energy security.
So in 2014 in Rome, the G-7 members adopted a set of principles around what it means to build towards an increased understanding and realization of energy security, and it hinges on many of the things that have been touched upon in these remarks and that we sometimes take for granted, in the way that U.S. natural markets in particular have developed, and energy markets more generally – that you need a diversity of supply, you need flexible and resilient infrastructure, you need transparent and liquid markets. And these concepts are the underpinnings for the dialogue that will happen in Kitakyushu on Monday and Tuesday, and a fundamental part of that is the role that natural gas is going to play.
So with our G-7 partners, we’re talking about the role of increased integration and liquidity of global gas markets, the resilience of gas market infrastructure and the role that plays, market transparency, emergency frameworks for responding in the instances of disruptions in supplies, and understanding how we can expand both the production and the use of natural gas in support of our energy security as well as our climate security objectives.
One of the practical aspects that Marty touched on is the pervasive natural gas infrastructure that we take for granted, to some extent, in the United States. We have over 4.6 million miles of natural gas pipeline alone in this country. It’s not replicated anywhere on the planet. That gives us an incredible flexibility, durability and deliverability of supply wherever we need it , increasingly to things like LNG terminals that are being built, as well as new industrial uses for natural gas. So you can see how increased deliverability of natural gas is also in many parts of this country already enhancing our economic security.
I’m from the Louisiana Gulf Coast, actually very near where the Sabine Pass facility is being constructed. I was there for the third time on Monday, for the commissioning ceremony. It is an incredible feat of engineering and execution of project development. It is a perfect example of the types and the scale of infrastructure needed to actually deliver on energy security.
And it doesn’t come easily. Not only does it cost – I can’t remember the billion-dollar count that you’ve crossed, but years and years of planning and execution, of engineering, design, construction, as well as collaboration with local and federal governments. This is not easy to do. We do it quite a lot here in this country, in this energy space. We build pipelines all over this country. We have a fairly transparent and predictable federal regulatory process around siting and infrastructure. I know some of you in the room may take issue with aspects of that, but generally it works quite well. And I think the liquidity and the abundance that we’re seeing is a manifestation of that.
So as we work, as the U.S. government – and my partner – I mean my colleague Robin Dunnigan from the State Department touched on some of this in her remarks earlier – as we the U.S. government work with our colleagues in the G-7, IEA as they look at an updated concept of energy security, one of the key aspects that we’re talking about is what is needed to develop infrastructure, because if you’re just producing molecules and you’re not moving them where we need them, or you don’t have the receipt terminal infrastructure to receive the gas once we’ve actually got it on a cargo that someone like Cheniere might be sending out, then you’re not really maximizing the potential.
So one of the things that I think that we are going to increasingly need to focus on in our partnership with other – at a government level – our partnership with other countries, as well as in the dialogues that many of you are engaged in, is what are the best practices for securing the type of public support you need to build large-scale infrastructure, whether it’s a pipeline, a storage facility or an LNG receipt terminal? Because this is not simple and straightforward, and we’ve learned a lot of great lessons in the U.S. over many decades on this. And I think that we have a great story to tell, but it won’t deliver itself.
So transparency is something we’re focusing on in market development, we’re focusing on flexibility of supply with our European partners, but we’re also focusing on some of the steel-in-the-ground planning fundamentals of how you get that molecule where you need it. So space to watch there.
MS. HARDER: Great. Thanks, Paula.
And Gulmira, why don’t you take us back across the pond to Azerbaijan and Eastern Europe.
GULMIRA RZAYEVA: Thank you, Amy. Thanks a lot for having me here. It’s a great pleasure to be here today.
Well, let me focus on the Southern Gas Corridor. To me at the moment, it seems the only firm pipeline project that will bring gas from alternative sources to the European market; well, the only firm because of all the binding agreements that have been already signed by the Shah Deniz consortium, the gas producing companies, with the gas buyer companies. As you know, there are nine European buyers that will import the Shah Deniz gas, starting from late 2020.
So the gas is sold on the paper for 25 years, which actually makes quite predictable for the gas producer companies the margin for the next 25 years; and also, the gas transportation agreement has been signed for 25 years. This secured, for the gas producer companies, the market. It’s demand security for them; and for gas buyer companies, it’s supply security for the next 25 years.
Probably the most important decision, the final investment decision, was made in 2013, as you know, in December, and since then many things have been changed. The price for both oil and gas came down. And also, the markets where the gas will flow, the Turkish and the European markets, have been changed. Well, in terms of price, it seems that it has not affected so far the implementation of the project. It goes in accordance with the self-set schedule, and even I would say that some projects, for instance the Trans-Anatolian Gas Pipeline Project, which cross all the way going through the Turkey, it’s ahead of the schedule.
With regards to the market, well, let me start with Turkish market. The Turkish market it seems now particularly is desperate to import gas from alternative sources, to diversify its supply sources given current political tensions between Turkey and Russia. But apart from that, Turkey’s ramp-up or gas demand growth also makes it find a solution to import more gas to the market.
And the third reason why Turkey needs additional volume of gas is the expiration of almost all of the long-term contracts of Turkey with the current gas suppliers in the 2020s. The long-term contracts which Shah Deniz face, one is expiring in 2021, with Gazprom, some 4 bcm of gas is expiring in the same year, as well as Algerian LNG contract also expiring in the 2021. Apart from that, there are some 16 bcm of gas with Gazprom transporting through the Blue Stream pipeline, expiring in 2024, the Iranian contract also expiring in 2026.
So we don’t know whether these contracts will be extended or not. I think all of them to some extent are under a big question. We don’t know whether the Shah Deniz 1 contract will be extended, I think subject to availability of the gas. And then the contracts with Russia, with the Russian Gazprom, is also under question. I think this depends on the geopolitical development in the region and the political relations between two countries.
The gas demand in Europe. Well, despite – since the crisis in 2008, the gas demand in the market was quite sluggish. Starting from 2015, there were some good signs of demand, but it – slow, but demand growth, some 4 (percent) to 5 percent of demand growth average in Europe. And I think this is a good sign for gas supplier companies.
Well, apart from that, of course, the production loss in Europe is expected to be some 150 bcm by 2030, which needs to be substituted by the gas coming from alternative sources. And also, again, the expiration of the contracts. Some long-term contracts with the Russian Gazprom for some countries, probably those countries will want to replace some volumes of gas coming from alternative sources.
My second point is the funding of the project of the Southern Gas Corridor in all its segments, the expansion of the existing South Caucasus pipeline, the tunnel pipeline, and also the European part of the value chain, the TAP pipeline. The Azerbaijani share in all this value chain in money equivalent is around $12.1 billion. Some part of this amount, some 2 billions, have been already financed by the government in the forms of equity and by the Statoil fund. But still, $7.7 billion needs to be raised, and it would be long-term loans.
So last month, in March, the delegation representing the government of Azerbaijan visited to the U.S. They met with U.S. banks to sell the bonds for the amount of $1 billion. And that was quite a successful road show they had here. They succeeded to sell 1 billion (dollars) of bonds. I think this will be continued probably every year until 2019 so to raise the $7.7 billion.
So for this aim, the government of Azerbaijan created so-called the Southern Gas Corridor company, which is directly and indirectly – belongs to the government . The government has 100 percent share in this. Well, 51 percent belongs to government, and 49 percent of share owns SOCAR, which is also a 100-percent Statoil company. So this company was created to consolidate, manage and finance the Southern Gas Corridor – the Azerbaijan interest in the project – but it’s not operating the project. It’s SOCAR who is operating the value chains.
Another point that I would like to raise – it’s quite important especially now when we, unfortunately, had just recently, earlier this month, this escalation of the conflict in the Nagorno-Karabakh, which was unfortunate. They had the casualties from both sides. And this brings the issue of security of the pipeline. Well, some parts of the pipeline pass through the front line. There is a 20-kilometer – the pipeline is 20 kilometers away from the front line where the escalation occurred. And there was some quite hostile rhetorics coming from the Armenian leadership, is that the infrastructure will be targeted.
Well, I think it’s obvious that the security of – there were some attempts to undermine the security of the pipeline in the region, but I just would want to say that it’s at the moment quite secure because so far nothing has happened, and I don’t think that anything would happen to the pipeline. It’s secured quite well by all the countries participating in this project, by Azerbaijan, Georgia and Turkey.
And my final point is the regional cooperation that this project brings. Well, it’s not about only the bringing some 16 bcm of gas to the Turkish and the European markets from the Shah Deniz fields. I think it’s also very important that there is a very good example of partnership in the regions, especially partnership between Azerbaijan, Georgia and Turkey. Probably Azerbaijan and Georgia is the only two post-Soviet countries that have this kind of close political and economic partnership in the region, which was – also I have to probably mention – which was trying to be undermined, the trust between two countries trying to be undermined. And I refer to the price issues that we had just recently with Georgia, the SOCAR price issues.
I think this trust that exists between two countries is quite strong and it will continue in the same path for decades to come. And it’s not only about the gas projects, but other transportation projects that currently two countries are trying, are in the way of implementing, such as the main transportation projects, One Belt, One Road, and other projects.
So I’ll stop here.
MS. HARDER: Great. Well, thank you all for those great comments.
My first question is a lightning round, which means you answer yes or no, and no more than that, if at all possible. We’ve touched on this a little bit in a couple of your comments, but I just want to take a very big picture here. Do you think that there will eventually be a global natural gas price like there is a global oil price?
So if you can just say yes or no. Do you think eventually, whether that’s five years, 10 years down the road, or no, you don’t think that will ever happen?
MR. COOTE: Yes.
MS. GANT: (Pause.)
MS. HARDER: This is not your opinion, now; this is just your prediction.
MS. GANT: No.
MR. WALKER: Sort of. (Laughter.)
MS. HARDER: It’s only A or B. That works for now.
MS. RZAYEVA: Well, I think yes.
MR. DURBIN: No.
MS. HARDER: (To Ms. Rzayeva.) And see, that’s a clever delay tactic, to take a drink while you think. I do that sometimes too.
Marty, what was your answer?
MR. DURBIN: I said no.
MS. HARDER: You said no.
So now audience, it’s your turn. Please raise your hand if you think there will eventually at some point be a global natural gas price like there is a global oil price. (Show of hands.) OK, got a few hands up. Just making sure you’re still awake, mainly.
Can I get any of you to please elaborate on why you think – now I’m allowing you to talk more. Maybe Andrew, you can talk about why you think “sort of” is your answer.
MR. WALKER: Well, we would have to kind of define the question a little more to see exactly what you mean. You did say in the way that you see that with oil. And yes, I think you have to realize where LNG has come from. It’s been a bilateral industry that has been very bespoke between supplier and buyer, integrated chains. There was no – particularly in Asia, there was no gas market to price the gas against. There was no gas-on-gas competition. The only way to price it was to decide to price it against the alternatives for the buyers, which in many cases was crude oil. So you have a very particular industry which is not commoditized, which is not liquid.
We are definitely moving in that direction, as I said. You know, I think we – the commentators all agree we’re heading in that direction. The time frame might be the question, and then exactly what it looks like when we get there. Will there be a spot liquid component that is priced like oil, cargoes on the water? Absolutely. And I think we’ll see that sooner than we believe.
MS. HARDER: Like five years, 10 years?
MR. WALKER: Yeah, probably before that. I think we’re going to see liquidity in the Gulf, the Gulf of Mexico, where you have 20-plus buyers from those four projects on the Gulf at the moment – but there may be more – that are buying cargoes of a similar specification. It’s all coming from the grid, close geographic proximity, a lot of those cargoes backstopped on a flexible basis against hub markets elsewhere, so they could swing. That’s going to look a lot like Brent liquidity in the formation of the Brent market.
So I think that’s the first step to liquidity in the LNG industry. It’s going to be supply side liquidity. And then the next step is to create cargo liquidity in the market end because you’d like the pricing to actually be closer to the markets in the Gulf of Mexico.
Is there a cargo index – and I’m talking about cargoes rather than gas markets because there is a difference – is there a cargo index in Japan or Singapore or China or all three? You know, that’s a debate at the moment in the industry.
You’ll also see the global gas prices because I think there will still be a regionality to it. Europe will price on a different basis than the U.S., than Asia, against different fundamentals. But those in the more liquid competitive market will inevitably be much closer, so we won’t see the spreads. You know, business abhors an arbitrage. It will try and take that arbitrage out. And so you will see a much more global price set. You will see a liquid element, but it won’t be exactly like crude oil – where everything is sold on that basis – for a while because you kind of need a tilt point – the chicken-and-egg, you know, tilt point to enough liquidity that you can finance supply on the liquid market, and we’re far from that in LNG at the moment.
MS. HARDER: Great.
Paula, you said something that interested me about the importance of infrastructure, in our point here, the pipelines and the LNG export terminals, and then you mentioned about the public support for that infrastructure, kind of tying into what Marty had said about – I infer that as perhaps the concern about some of the opposition that a lot of these projects, whether they’re terminals or pipelines, are facing.
How does the Energy Department, and the administration more generally, view these issue? And is this something that you try to stay out of? Is it something that you support? And how do you think it’s impacting some of these projects, whether it’s – you the Constitution pipeline just last week got a permit rejected by the New York regulators, and there are some other examples. But how does the administration view these issues?
MS. GANT: So I can say federalism is alive and well in this country. Certainly people are aware of the potential impact of the Constitution, the snag that that pipeline has hit. I can say that the administration does very keenly understand the importance that infrastructure plays. And if we just specifically talk about natural gas – I mean there’s a lot of work going on in electric and other infrastructure as well, but there’s no – it’s very clear that the key reason that we’ve been able to take this abundant supply and turn it into economic value is because of our pervasive infrastructure. I mean, technology and innovation delivered the resource to us, but our pervasive infrastructure has allowed us to get it where we need it, to heat our homes and businesses, to run industry and to turn it into other products in our petrochemical sector and to deliver it to facilities like Sabine Pass.
And in our dialogues with other countries, they’re very interested in the American experience. And it’s something that we actually don’t talk about a lot, generally, because we tend to take it for granted. Infrastructure in this country tends to be invisible, and we only notice it if it’s not working well or something happens to it. For example, people around the world are interested in things like Henry Hub: “Who is Henry, and how did he become a hub?” kind of story. And we talk about that a lot. The role that Mont Belvieu plays, in Texas. The gas storage and fractionization and processing mega-complex that is unrivaled anywhere on this planet is a vital part of turning these hydrocarbon molecules into economic value all along the Gulf Coast and driving the Gulf Coast economy.
And we spend a good bit of time talking to our partners about how that came about and how you build a process – for example, the Federal Energy Regulatory Commission’s process for engaging stakeholders and landowners early to help them understand how the infrastructure project’s going to be developed. The experience Cheniere has had in Cameron Parish, Louisiana, in engaging the community to understand what the impacts of this development would be. There’s a lot of great success stories in this country, and it’s the backbone of this energy abundance that we’re enjoying, and we spend a lot of time with our partners working on that. And I think here domestically, the administration has a great appreciation for the role that that pipeline infrastructure plays in our energy security and our economic quality of life.
MS. HARDER: So just a quick lay of the land from a regulatory perspective. I’m sure many of you are steeped in these details much more than I am, but just a little backdrop. So there’s about some 60 LNG export terminal applications submitted to the Energy Department, a few of them which have been approved and many others that have not been yet, and then about 30 applications pending or in early filing stages at the Federal Energy Regulatory Commission.
I want to ask you, Marty, what percentage of those projects do you think will ultimately be approved, built and then actually exporting LNG?
MR. DURBIN: Well, it’s kind of hard to put a specific number to it. What I’ll tell you is that the market’s going to determine how many of those are built and how much gets exported, which is why I think from the beginning of this process – and I’m not – this isn’t to be confrontational with Department of Energy. I mean, you know, they’ve – there has been a –
MS. HARDER: We like confrontation, so go ahead, Marty.
MR. DURBIN: Oh, I know you – we’re trying to make news here, right? But I think our argument from the beginning of this process was, from a DOE perspective, I understand their role is to – for non-FTA, you know, exports, is it in the public interest? We certainly believe that you could say in a blanket way, yes, exporting LNG – to non-FTA countries, even – is in the public interest. Now, let the FERC process play out the way it is. Again, it is a very expensive, it is a very comprehensive process, it does get into all the issues and it allows for the public engagement. That is clearly a necessary part of this.
But at the end of the day, as we’ve seen the last couple of years, the market’s determining who’s actually going to – who can get the capital, who can line up the customers, who can actually, you know, get the construction to happen. I mean, this is not one of these issues where, gee, if we approve 30 facilities, 30 facilities are going to be built. And I know DOE doesn’t believe that, and that’s not an issue.
MS. HARDER: Does DOE believe that?
MS. GANT: Pardon?
MS. HARDER: Does DOE –
MS. GANT: That all of the projects that have been proposed will be built? I think we’ve said consistently, the market will sort that out and that’s highly unlikely. But we consider projects as they come to us and they’ve completed their environmental review at FERC so that they’re ready to move forward.
MS. HARDER: So I’m sure some of you may have seen the news that the Canadian company Veresen got its permits rejected, or application denied, at FERC. FERC cited a lack of demand for the project’s connecting pipeline meant that the adverse impacts on the surrounding community were not justified. This is just the second LNG project that FERC says it has ever denied before. The other one was an import facility in Rhode Island that the commission denied based on safety concerns.
This is a question for anybody to answer, but do you think that that denial is an outlier or a trend, beginning of a trend?
MR. DURBIN: I would say I don’t believe it’s a beginning of a trend. I think they made fairly clear in their decision it was an economic – it was denied at this time for economic reasons. There’s opportunity, you know, for the company to – they have asked for rehearing, that they’ve got other options going forward.
I mean, to me the good news there is that it wasn’t – this wasn’t the – this wasn’t a debate about environmental issues. Again, I give credit to the federal agencies. I think FERC has done a very good job of defending what its role and its authority is. I think DOE has, as well. But again, this is one of those areas where I think that the government – and I’d point – I’ll say the administration needs to be able to speak more clearly, again not that there should be any perception that we want to see minimizing public engagement here, that’s absolutely critical, or even about federalism. Yes, the states have a role, locals have a role as well.
But I do think there’s got to be a stronger voice here saying these statements out there that say it can’t be produced safely – you know, there’s no way of producing it safely, all pipelines are bad, or we’re locking ourselves into something for generations to come – I mean, I’m sorry, I’m not the best messenger to go out there and say, oh, no, there really is – we really do have to have all of these, but I think that there are more voices – and I don’t mean to pick just on the administration. There’s, you know, elected officials at all levels, the customers who are going to benefit from this, consumer groups, you name it, that can attest to the fact that all of this type of infrastructure is going to bring great benefits.
MS. HARDER: Bud, I want to come back to you. In a former position you were the CIA’s top energy analyst, which sounds fascinating. Feel free to tell us everything that you learned during your time there. (Laughter.) Absent that admittance, I want to talk to you a little bit about kind of the geopolitical heft of natural gas.
I remember when I first started at the Journal in February 2014, my first Page One article for the paper was all about how the Ukraine crisis was going to catapult LNG exports across the finish line. I think that was relatively true. But do you think that the promise and the allure of the U.S. oil and natural gas boom has delivered upon the geopolitical benefits that we’ve been talking about for the last five to six years?
MR. COOTE: I’d say the largest benefits are probably to come. If we look at the history, as Andrew referred to, back in 2008 we saw the beginning of the U.S. gas shale gale. In 2008, Russia signed a contract with Turkmenistan to import 40 billion cubic meters of gas in 2009 at a substantially high price. Three months later, an explosion in the pipeline from Turkmenistan ended that flow and Russia was able to take the 30 bcm that it was losing in market sales because of the U.S. deferral of LNG imports back on to Turkmenistan, and for the rest of the year, they took no Turkmen gas.
Now, I heard in our earlier session that we haven’t seen Russia fire the energy weapon in the past two years. From my viewpoint, I saw 44 of those firings from the Caspian Sea in the form of missiles toward Syria. That was a clear message, to me, that Russia is in charge in the Caspian Sea, and certainly nobody is going to build a pipeline across the Caspian Sea in the southern part where those ships were located. We may have seen another weapon, another reminder of Putin’s weight in the Nagorno-Karabakh scenario as well.
So I think Europe needs U.S. LNG.
MS. HARDER: Great.
Well, Gulmira, I would like you to kind of respond and to get your thoughts on what he just said.
And also, please, you in the audience, if you have any questions, be thinking of them because I’m going to be coming to you in just one moment. I see one hand in the back, so I will remember you in a moment.
But Gulmira, can you kind of talk about – I mean, is Europe wanting U.S. LNG as much as they were telling the U.S.? At least from a media perspective, I remember I heard from them a lot more two years ago than I am today. Is that demand just as great as it was then?
MS. RZAYEVA: Well, as I said, the demand seems to be slowly recovering in Europe starting from last year. That was what the statistics say, some 4, 5 percent of growth. Well, it’s not only demand, but also I think some European countries would want to diversify their supply sources, especially those which are entirely reliant on one supply source. And there would be some attempts to import gas from alternative sources, both pipe gas and LNG.
Well, with regards to the competition between the pipe gas or LNG, I think many things will depend, obviously, on price. Price is decisive in this case because at the moment, well, it seems that the pipe gas price is lower than LNG price. Well, given this low-price environment, the current Russian pipe gas price at the moment is $4.6 per MMBtu, whereas the landed, I think, U.S. LNG would be a bit more than that, around – now it’s better, but I think around 6.5 (dollars) or $7 per MMBtu. But this is, I think, the temporary manifestation. This can be changed in the future since there will be a demand for both pipe gas and LNG in the future. The main issue here is the gas from alternative sources.
MS. HARDER: Great.
We had a question –
MS. GANT: Could I add something just really quickly? Because I think that it’s important to distinguish between what is the demand for U.S. LNG, which is an economic matter, and what is the impact of the availability of U.S. LNG, which is a geopolitical matter. And before even the first of the seven cargoes left Sabine Pass, the potential availability of U.S. LNG was already having a disruptive influence on the balance of power between producers and consumers, as Andrew referenced. And we expect that disruptive influence to continue. And that is good for our energy security and that of our trading partners and allies globally.
MS. HARDER: Great.
A question in the back? And please say your name and your affiliation.
Q: Albert Nahas, Cheniere Energy.
MR. WALKER: Hey, Albert.
Q: Just a small thing about the price. We’re landing at the European hub prices. So I don’t think – you know, my question is to everybody except Andrew Walker, who – (laughter) – knows much more than I do anyhow. But we’re all talking about the availability of U.S. LNG, et cetera, et cetera, delays in the licensing process, infrastructure problems in the U.S., but the real issue is that now you have 70 million tons per year coming, licensed from the U.S., I don’t see a rush from Eastern Europe, Central Europe or – you know, to come and buy any of those 70 million tons. They’re there. They’re available for the taking. The licensing is not an issue. There are buyers in Europe, at all parts of Europe. But the problem seems to be now in Europe.
Would you –
MS. HARDER: And what’s your question?
Q: Would you agree with that view or not? Because the quantities are available and the issues are all, is Europe applying the same regulatory issues to its pipelines in the East as it is in the West? Is Europe allowing free transport of gas across its own pipelines? Why are Central and Eastern European governments constantly clamoring for easier access to the gas, but then their own companies are fighting off any offer of gas from diverse supplies?
So I would like your view as to whether I’m looking at this with a jaundiced eye, an experienced eye, or maybe I’m on to something. Thank you.
MS. HARDER: Maybe Gulmira or Bud or Paula could answer that question?
You’re not allowed.
MR. WALKER: I got a bye on this one.
MS. RZAYEVA: Well, again, I think, yeah, you correctly mentioned the problem within Europe is infrastructure. Well, the most needed gas in Europe is the southwest European – south and southwest European region, which is not really well-connected with the north and western European regions. So this is one reason, I think.
And the second reason, I think, again is the price. And a good example would be probably the Lithuanian LNG terminal. They invested around $1.5 billion in building their terminal, and then they started importing LNG from Statoil, but then they had to halt it because of the high price for LNG, and then Statoil had to make some concessions and discount for LNG price and they resumed the import.
So I think at the moment, the main problem with LNG is the price. But again, this could be a temporary manifestation. I think this will be changed in the future, but for the time being, it’s a probably not competitive.
MS. HARDER: I think we have time for one or two more questions. This woman right here.
Q: Hi. Debra Kagan (sp) from Johns Hopkins SAIS.
Two quick questions. The first is, because of liquidity and fluctuations in the market, is it a reasonable expectation for companies to expect to continue to sign long-term contracts, considering how the market is playing out? And are those days gone?
And the second question is on the disruptive influence of Russia. Do our Azeris friends feel that if they become overly competitive in the European market, will Russia start playing more games in Nagorno-Karabakh and elsewhere to disrupt your flow of Caspian oil to Europe – Caspian gas to Europe?
MR. WALKER: I’ll take the first one.
MS. HARDER: OK.
MR. WALKER: But before I do that, can I just make two clarifications? I’ve been sitting quietly.
MS. HARDER: Mmm hmm.
MR. WALKER: One was the import project was not actually stopped because of safety issues. I just want to make that absolutely clear.
MS. HARDER: Well, that’s what FERC told me, so I blame FERC. (Laughter.)
MR. WALKER: No, it was to do with grandfather rights in terms of the tank that was already there; and if it was changed, if it had a change of use, whether those grandfather rights would change in terms of the exclusion zone; and if they did change, then the project didn’t work. So it wasn’t safety per se.
MS.HARDER: Good to know. I will email FERC back.
MR. WALKER: I don’t want the message to go out that LNG facilities can be unsafe, because FERC is very strict about how you build them and has put in place design criteria to make sure they are as safe as they possibly can be.
MS. HARDER: Your LNG import and export knowledge is impressive.
MR. WALKER: Thank you. I worked on that project, by the way. So.
MS. HARDER: OK.
MR. WALKER: And then secondly, just a clarification on what Gulmira said. The $7 – and this goes back to what my colleague Albert there was saying – the $7 is the cost of U.S. LNG to Europe, 7 (dollars) to $8 in terms of Henry Hub plus the cost of liquefaction plus the cost of shipping, all in capital cost. But LNG will be a price tag from Europe, and there’s such a thing as long-run marginal cost and short-run marginal cost. And when industries get into oversupply, they go into short-run marginal cost, which is cash flow, cash cost. And unfortunately, we are heading into kind of looking at cash costs rather than the full cost of the supply chain for the next few years. Once that oversupply is worked through, then it will take 7 (dollars) or $8 prices in Europe to incentivize new investments in supply.
And that kind of comes back to the conundrum that my colleague Albert was referring to. You have cheap spot prices in Europe at the moment, 4.38 the day before yesterday for MBP. You can’t build new capacity, new LNG capacity for that, and that sets the conundrum for the buyers. Do they commit strategically to 7 (dollar) to $8 gas in future in order to incentivize future supplies, or do they just take $4 now and worry about the future later, knowing that we’re a cyclical industry and what goes around comes around? Tightness.
To answer the question, before we get thrown off the podium, it comes down to capital availability and financing. If you’re a bank and you’ll lend me money on the basis that I don’t have long-term contracts, then I’ll build capacity. At the moment, the banks put it quite – one of the banks put it quite well the other day when they said, we understand commoditization, but be aware we will not loan money to infrastructure providers who have no long-term contracts, with no certainty of price and lower credit off-takers. There’s a kind of a fair way of mix.
So we’re moving in that direction, and we’ll see shorter-tenure contracts or a mix of contracts, and some spot pricing, some long-term pricing, but the banks just don’t believe the market is liquid enough to lend against the liquidity of the markets. We’ll get there one day; the question is, how quickly.
MS. HARDER: I have one more question, lightning round question.
MR. WALKER: There was a second piece to that question.
MS. HARDER: Oh, there was. And are you going to answer that, or did you want to?
MS. GULMIRA: Well, you know, only 10 bcm of gas is going to reach the European market. And I don’t think that in this – I mean, Azerbaijan or the gas producer company that aim to compete with any supplier in Europe because, well, if you are talking about Russia, then 10 bcm versus 130-plus bcm of gas cannot compete, or the Azeri gas cannot compete with Russian gas. The volumes are too small. There is no competition in these regards.
And regarding the conflict, well, yes, unfortunately, we had this escalation and it seems that it’s going on. There’s something every day. And it shows that the conflict is not frozen, since some people are dying on the front lines every single day. Well, of course, that would be just great if the conflict be solved and we would materialize and realize these projects in a more stable and secure region. But this also, I think, is something that is not only in the hands of Armenia and Azerbaijan, of two sides, but also some major powers, such as the U.S., Russia and EU, should be closely involved in resolution of this conflict.
MS. HARDER: Great. And because we’re out of time, this lightning round will also require only a yes-or-no answer. Do you think the global glut of natural gas will ever end? (Laughter.) (Pause.)
MR. COOTE: Yes.
MS. GANT: Yes.
MR. WALKER: Yes.
MS. RZAYEVA: Well, yes, I think.
MR. DURBIN: Yes.
MS. HARDER: Well, then that concludes. Thanks for that consensus, at least.
I want to thank you all for the panel, and also you in the audience for asking great questions. Thank you very much. (Applause.)