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Investing in liquefied natural gas shipping: A key overview

Part 7
Investing in liquefied natural gas shipping: A key overview (Part 7 of 12)

Why liquefaction costs will affect liquefied natural gas trade growth

Liquefaction cost

Whether future LNG contracts will be based more on oil or natural gas is up to debate. Note that whether more liquefaction capacity will come online will depend on liquefaction cost, which in turn affects demand for LNG carriers and companies and ETFs such as Golar LNG Ltd. (GLNG), GasLog Ltd. (GLOG), Golar LNG Partners LP (GMLP), Teekay LNG Partners LP (TGP), Dynagas LNG Partners LP (DLNG), and the Guggenheim Shipping ETF (SEA).

LNG Value Chain Cost and PricingEnlarge Graph

Liquefaction is one of the most expensive costs throughout the LNG value chain, and it can range from $3.00 per MMBtu (millions of British thermal units) for brownfield projects in the United States to as high as $10.00 per MMBtu in Australia for greenfield projects, so that investors can generate decent returns, based on a study done by the Canadian Energy Research Institute.

Calls from Asian buyers to link LNG prices to the United States’ Henry Hub could make several liquefaction projects unprofitable. Yet keep in mind that actual natural gas prices in 2016 and beyond could be materially higher from current estimated futures prices as world LNG prices and natural gas prices in the United States become closely linked.

However, even if there were demand for LNGs priced based on spot oil prices, new liquefaction projects could still be at risk of running over. Energy companies such as Chevron and Exxon in Australia have been facing cost overruns due to high (or higher) labor and equipment costs—given poor labor productivity, intense competition among energy and material companies for supplies, and the remoteness of natural gas and LNG projects.  Unless there’s demand for high(er) LNG prices, persistently high liquefaction cost could negatively affect competitiveness of LNG business, and affect LNG carriers.

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