Envisioning the New Global Marketplace

By Joe Naylor, Vice President, Strategy, Planning and Business Support
ChevronTexaco Global Gas

International Energy Agency's Global Natural Gas Dialogue

Houston, Texas

In considering the topic for this panel — global liquefied natural gas (LNG) markets — we are of course talking mostly about tomorrow, not today.

Experts will gather at conferences like these. Speakers will cite impressive numbers in dollars and metric tons per year. And LNG tankers will continue to crisscross the globe. But even on the long voyages between the Middle East and Asia, or Alaska and Japan, those vessels are serving point-to-point supply relationships, not a dynamic global marketplace.

Gas and even LNG are still regional markets for the most part, and the terms, flexibility, customers, contracts and regulatory environments differ considerably for each region. Still, all of us in the gas supply chain stand to benefit tremendously from the globalization of gas. And this is the vision that all of us must embrace.

I can tell you that ChevronTexaco shares this vision — and to help make it a reality, we've structured our new Global Gas company to combine all the elements of the LNG value chains of tomorrow. I note, in passing, that ConocoPhillips has also recently announced the formation of a global gas organization. For us, this reaffirms the value in bringing all the elements together.

ChevronTexaco is progressing on multiple projects to help globalize the gas business. We are working on a number of LNG terminals in North America, and we're working on new LNG and gas-to-liquids (GTL) export projects in Australia, Africa, the Middle East, and Latin America — with Asian, North American and European customers in mind.

What will it take to establish a new global LNG market? Let's consider two regions of the globe that seem to be getting a lot of headlines these days: Asia and North America.

Not to oversimplify the situation — but I would suggest to you that the Asian market needs to get a little more North American, and the North American market needs to get a bit more Asian.

At the recent LNG 14 conference in Doha, Qatar, Hashimoto-san — the general manager of Tokyo Electric — explained how his company recently covered a shortfall in electric power by shopping the LNG market and bringing in 25 percent more LNG than their usual consumption.

The Asian market was able to flex and stretch to cover his situation. That gave us a glimpse of what the Asian market can become. Cargoes were redirected, buyers bought LNG from other long-term buyers, and suppliers showed their flexibility to cover Mr. Hashimoto's needs.

Add China, India and the North America West Coast to the established Asian LNG buyers — Japan, South Korea and Taiwan — and you have the critical mass for a global LNG marketplace.

However, the Asian LNG trade was built on very long-term contracts designed to provide financial certainty sufficient to underpin the massive investments required by both the buyers and sellers of LNG.

This is the likely model for tomorrow as well. The idea of building LNG projects in Asia completely on spec — with no foundation customers and relying entirely on the spot market - seems many years away.

However, we're already seeing projects being sanctioned without full capacity committed to customers. Additionally, there are long-term contracts expiring in the next five to 10 years that could result in significant uncommitted LNG capacity in the marketplace — and the ships to move it. So we're seeing the genesis of a spot market in Asia. We see a market getting more liquid and more responsive to short-term conditions.

This sounds a bit like North America, so let's shift our focus there. With the dramatic demand forecasts from the National Petroleum Council and others, everyone wants a piece of the North America LNG market. On the surface, it looks like a 21st-century Gold Rush. It's a true liquid marketplace for gas, where supply and demand are matched minute by minute, day by day, month by month. But some LNG sellers and buyers may want some longer-term contracts with the longer-term certainty they provide — thus, a slight shift to a more Asian model.

But these longer-term contracts may have some risks — not security risks, and certainly not volume risks, but market risks. And if this involves a regulated utility, there are potential regulatory risks that create uncertainties for big capital projects — the kinds of uncertainties that companies making large investments prefer to avoid. Nevertheless, by working closely with regulators, buyers and sellers, we can, I believe, structure contracts to match buyers, sellers and bankers' needs.

So, both the Asia and North America market models seem to be evolving toward a similar model. We need the best of both worlds. We need a blend of long-, medium- and short-term LNG sales agreements with an active spot market, within a larger, global market overall.

Ultimately, we need not only safe, foundation volumes but also competitive opportunities — with producers filling gaps, customers shopping from a larger pool of producers, and consumers and business enjoying gas and electricity without interruption.

I would add that a healthy LNG marketplace promises more than new business opportunities and more than new energy security. It promises lower price volatility as well. Commodity markets become more volatile when supplies are tight, the supply outlook is unclear and the number of suppliers is limited. Add to that some bottlenecks in the distribution system, and the recipe is complete.

An actual example I can give relates to a particular U.S. distribution system in which as the systems become more constrained, the price tends to become more sensitive to additional demand, thus creating volatility.

Federal Reserve Chairman Alan Greenspan on two separate occasions has specifically mentioned the importance of new LNG and its future potential to arrest volatility in natural gas prices in North America. In short, failing to provide a secure marketplace attractive to new LNG projects could do some real damage to the economy and the quality of life in America. Customers will worry, and investors will hesitate. Right now, we can't afford either of those things.

Gas customers in particular need to be assured that gas will be competitive in price and secure in supply. We have to cover both requirements; otherwise, companies can't plan for the future.

To be involved in the LNG value chain today is more than an opportunity. It is a responsibility. LNG is extremely important to the people and the economies of the world, important to the environment and important to the quality of life.

And each of us has a key role to play along the value chain. The producing countries and the energy companies developing and operating the big export projects need to keep the promise of both supply reliability and competitive pricing — and to promise and deliver safety as well.

The example of Australia comes to mind here. They've set a high standard on LNG reliability and competitiveness. They're determined to keep setting that standard as they grow their exports with projects like the North West Shelf expansion and Gorgon LNG.

The behavior of the importing countries is equally important; they will be the true architects of tomorrow's LNG marketplace. In the newly importing countries such as China, there is clear support for making LNG a key element of the energy mix. At the same time, in South Korea we're seeing productive discussions for market reforms that will help attract growing volumes of LNG.

As for North America, we need government leaders and regulators at all levels to embrace the LNG future and help to make it a reality. We're seeing delays and barriers to new projects. Import-terminal proposals in Maine and California have been voted down. LNG terminals are more acceptable to the U.S. Gulf Coast, where, geographically speaking, they are farther from the markets that need them the most.

But that's just the bad news. The good news is that at both the federal and state levels, we're seeing a strong recognition for the benefits of LNG. The U.S. Department of Energy, the Department of Transportation, the Coast Guard and other agencies are working together to speed the permits along.

At the same time, we have great examples of positive contributions at the state level. The California Energy Commission (CEC) is taking a leading role to help create an LNG future in North America. They're educating the public about LNG and rallying the agencies that are necessary to make LNG a part of the state's energy mix. David Maul from the CEC came right out recently and told energy companies: "We need your LNG."

Michael Taylor, the director of Petrochemical/Environmental Technology for the Louisiana Economic Department, spoke to me before this session and said, "The 'L' in 'LNG' stands for 'Louisiana.'" We need this same kind of spirit in other U.S. states and communities that stand to benefit from LNG imports.

As for the gas customers, the trends in Asia are fairly clear. After decades of fairly rigid supply contracts, we're seeing new approaches to pricing and supply strategy. At the same time, with some of the buyers taking equity interests in LNG-export projects, the line between a buyer and seller is becoming blurred.

As for North American customers, we know the demand will be there, but the ability to access the market through regasification facilities and the ability of U.S. regulators, buyers and sellers to adjust to the international LNG market remains unclear.

Again, the global LNG marketplace is really just a vision at this point. But I believe it can blossom and can prosper — with multiple supply sources, multiple buyers and the flexibility, networking and trading opportunities that come with greater scale.

I believe the regional markets in Asia and North America will evolve such that one adopts the positive characteristics of the other. Thus, we will begin to see an evolution from several regional LNG markets to a truly global market.

LNG isn't a new industry. But it is different — and it's new to many of those who are now making decisions about its future. That means we'll probably have to walk down some new paths together to make it grow. We will have to educate and we will have to learn.

And when we're successful, as I know we will be, and the benefits are flowing in all directions, all of us will have something to be very proud of.

Thank you very much.

Updated: May 2004