Liquefied Natural Gas

Pitfalls and Practicalities

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!  Elicia Waggener, Insurance Manager, Freeport LNG

!  Archie Fallon, Senior Associate, King and Spalding

!  Art Smith, Executive Professor at Global Energy

Management Institute, C. T. Bauer College of
Business, University of Houston

!  Steven Weiss, SVP Marine, Aspen Insurance,

Moderator

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!  Natural gas (Methane) that has been converted to liquid form for
ease of storage and transport.
!  It is cooled until it liquefies at -259°F/-161°C, reducing the
volume approximately 630 times.
!  Shipped and stored at atmospheric pressure.
!  It is lighter than water when liquid, lighter than
air when vaporized.
!  Colorless, odorless, non-corrosive and non-toxic.
!  In the unlikely event of an LNG spill, the natural gas has little
chance of igniting an explosion.
!  Once delivered to its destination, LNG is warmed back into a gas
to be used like existing natural gas supplies, and sent through
pipelines for distribution.

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!  LNG has been transported globally for ~50 years
!  Beneficial for importing countries who:
•  lack indigenous sources of energy
•  have no access to gas pipelines, and/or
•  want diversification of supplier base

!  Provides opportunities for economic growth for exporting

countries

“Methane Pioneer”
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!  247 mtpa of global trade movements
in 2014

!  109 regasification terminals in 31

countries (~740 mtpa capacity)

!  92 liquefaction trains in 18 countries

(~300 mtpa capacity)

!  431 vessels in total fleet

!  10% of all gas consumed

!  30% of internationally traded gas

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!  LNG has a track record of consistently strong growth
•  6.8 compound annual growth rate (“CAGR”) from 2000 to 2013
!  Important trends shaping the global LNG market
•  Increasing trade flexibility
•  Nuclear uncertainty after Fukushima
•  Growth in Supply (Australia, U.S.)
•  Growth in LNG market demand
•  Areas where access to gas sources
is restricted (Asia)
•  Declining indigenous supply/
diversification of supply (Europe)
•  Emergence of new markets (Kuwait, Brazil)
•  Oil price volatility

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Source: BG Group

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Source: BG Group

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 !  Increased liquefaction capacity has almost doubled over the
past decade.
!  Qatar, Malaysia, and Australia have been the major LNG
producing countries.
!  Qatar has been the world’s prominent LNG supplier:
•  ~ 85 mtpa export
capacity from 14 LNG
trains
•  Accounts for ~ 33% of
global liquefaction
supply
•  A moratorium on future
development is currently
in place

•  Source: SG Cross Asset Research/

Commodities; GIIGNL
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Australia could be positioned to eclipse Qatar as the new
LNG export leader by 2018
!  Four operating LNG developments and six more under
construction
•  Exports are expected to quadruple over the next five years
•  Accounts for 43% of new capacity under construction globally
!  Commercial advantages offset by cost disadvantages
•  Rising labor and construction
costs
•  Currency fluctuation
•  Increased upstream costs due to
less than anticipated production
from coal seam wells

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 Source: EIA

!  Advancements of horizontal shale drilling techniques and hydraulic fracturing

technology leading to an unprecedented rise in gas production
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!  Until 2012, Australia was the country with the largest potential
new capacity (~53 mtpa)
!  Since 2012, there has been a proliferation of North American
LNG export projects:
•  Total capacity of all U.S. proposed export projects is ~ 230 mtpa

!  There also are 19 proposed projects in Western Canada and 5

projects in Eastern Canada

!  Most Canadian projects are struggling to reach Final Investment

Decision (“FID”) due to:
•  Complex environmental approval process
•  High cost of projects
•  Difficulties in securing firm offtake contracts in a weak market
•  Uncertainty created by low oil prices

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Approved North American LNG Export Terminals Proposed North American LNG Export Terminals (Pre-Filing
(Red and Yellow Dots) or Application Pending)
Source: FERC

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!  A key facilitator making U.S. Gulf/East Cost LNG export
projects much more competitive

With an LNG Vessel moving at

18.5 Knots, the extended route
would take an additional 31 days
and cost an additional $5,600,000
at an $100,000/day charter rate on
a round trip basis.
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(June 2015-via BG)
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!  Growing LNG demand in Asia
•  Recent emergence of developing gas markets, such as China, India,
Indonesia and Thailand

!  Europe has second highest LNG demand (and increasing)

•  Further development of European import market due to Russia-
Ukraine dispute
•  Diversification of supply

!  LNG demand increasing in

Americas
•  New or planned regasification
facilities, including Mexico,
Brazil and Argentina

!  Source: SG Cross Asset Research/Commodities; GIIGNL

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!  LNG imports in Asia account for 75% of global LNG imports
!  Japan accounts for 49% of imports in Asia and 36% of LNG international trade
!  South Korea is second largest importer in Asia and globally
!  China and India have emerged as new import markets due to economic growth
and the switch from coal to gas for power generation

Source: Gas Strategies 19

 2010-2025

Sources: Waterbourne LNG, IEA Monthly Gas Survey, IEA Statistics, IEA (2011) Author’s estimates via Oxford Institute for Energy
Studies 20
!  For any given geographical area, from an individual
oil-producing region to the planet as a whole, the
rate of petroleum production tends to follow a
bell-shaped curve.
!  Peak oil is the point in time when the maximum
rate of petroleum extraction is reached, after
which the rate of production is expected to enter M. King Hubbert
1903-1989
terminal decline. (Wikipedia)
!  By the late 1990s it was believed that peak oil and
natural gas production in North America had been
reached.
!  This led to the re-emergence of development of
LNG regasification (import) facilities in North
America by the early 2000s.

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Incentive to build US LNG Regasification

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 Pre- 2009
Normal
Normal
Range
Range
Pre 2009

CQG
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Incentive to build US LNG Regasification

Incentive to build US Liquefaction

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!  Global LNG prices are generally driven by alternative energy
source pricing. 

!  Crude oil prices increased dramatically over the period from

2003 to 2013, and global LNG prices followed this trend.

!  Despite the recent decline in oil prices, the cost of LNG

produced from the United States is still well below the oil-
linked global LNG price.
•  U.S. natural gas supply is not constrained; the U.S. resource
base, by some estimates, might approach a 200-year supply.
•  No indication that increased production at any foreseeable level
will result in a material increase in natural gas costs that would
drive prices higher.
!  Relative price competitiveness of U.S. exports is largely
determined by relativities of crude oil and Henry Hub
pricing, especially on projects already under construction.
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 Note: Asia long-term proxy = 14.85% JCC (-3) + 0.50
Oil parity=JCC=Japanese average crude price
Source: Platts, Heren, Petroleum Association of Japan and Bloomberg (June 2015-via BG)
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!  Historically, LNG contracts have had clauses that set the price,
duration, destination, and quality of LNG.

!  Most U.S. LNG contracts do not have destination clauses, or

restrictions that prohibit the resale or diversion of LNG to other
markets.
!  U.S. LNG contracts also provide for better flexibility of gas supply.

!  Two primary business models appear for U.S. LNG exports: the
buy-sell model and the tolling model
•  Under the buy-sell model, the seller assumes all risk associated with
feed gas procurement and delivery to liquefaction terminal resulting in
operational and credit exposure.

•  Under the tolling model, U.S. tollers are able to fix more of their LNG
supply chain costs, relative to traditional variable pricing based on oil-
linked indices.

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 Gas Supplier

Feed Gas Procurement

EPC Loan Agreements

EPC Contractor LNG Project Lenders

LNG Sale and Purchase

Contract

Customer/
LNG Buyer

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 Investors Operations

Construction O&M services

Equity Operator

EPC
Contractor(s) LNG Project/Train Owner

Toller
Long-Term
Debt Tolling Agreement

Lender(s)
Gas Supply

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Attribute Tolling Buy-Sell
Project is responsible for procuring feed gas Generally no √
and upstream pipeline capacity
Project bears risk of upstream constraints or Generally no √
lack of feed gas
Project bears commodity price risk Generally no √
Control over operations at the terminal varies √
Responsibility for export permits/ varies √
revocation risk
Responsibility for heel/ keep cool volumes varies √
Mitigate for customer’s failure to lift Curtail gas Harder to
receipts do without
shipping
Effect of project’s failure to perform for one Force majeure/ Limited
customer due to another customer’s failure indemnity by relief
other customer

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!  Breakeven oil prices on many of the world’s LNG projects are
estimated at $70-80 per barrel
!  China is expected to be a main source of future demand
growth
•  Concerns about China’s economy slowing down may undermine demand
outlook

!  Expansion of the Panama Canal should allow U.S. facilities to

deliver to the Asia Pacific market more cost effectively
•  Heavily dependent on market conditions and canal capacity

!  Construction costs are rising in many parts of the world

•  More than doubled during 2007-2013 compared with 2000-2006

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!  Large amount of new capacity currently under construction
could lead to an oversupplied market until at least 2020

!  Spot LNG prices are low and falling

!  Some buyers are reluctant to enter into long-term contracts

in the current market environment
!  Long-term gas sales contracts and/or take-or-pay
agreements are necessary for large-scale LNG projects to
put financing in place

!  Challenging for LNG projects currently under consideration

to reach FID

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!  Construction insurance policies often procured for LNG
projects include:
•  Construction All Risk (including DSU)
•  Project Cargo (including DSU)
•  Commercial General Liability
•  Construction Liability
•  Pollution Liability
•  Worker’s Compensation
•  Terrorism (including DSU)
•  Auto
•  Directors and Officers Liability
•  Foreign Trip Travel/Kidnap and Ransom
!  Insurance policies often procured for operating LNG
terminals include:
•  Operational Property (including BI)
•  Marine Terminal Operators Liability
•  Commercial General Liability
•  Pollution Liability
•  Worker’s Compensation
•  Employer’s Liability
•  Auto
•  Terrorism (including BI)
•  Directors and Officers Liability
•  Cyber
•  Hull and Machinery/Protection and Indemnity
•  Foreign Trip Travel/Kidnap and Ransom
!  Types and limits of insurance procured affected by :
•  Locations of the project/terminal
•  Natural catastrophe exposures
•  Geopolitical exposures
•  Aggregation of other projects and/or facilities in region

•  Lenders/Financiers involvement
•  Limits required often related to estimated maximum loss
•  High limit requirements for delay-in-startup (“DSU”)/business interruption (“BI”)

•  Owner controlled vs. Contractor controlled policies for construction

•  Cost plus or Lump Sum Turn-key contract
•  Existing facilities
•  EPC contract requirements
•  Captive involvement and/or high self-insured retentions

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!  Financial Stability
!  Capacity Limits
•  How many markets will need
to be involved?
!  Soft Market vs. Hard market
!  Aggregation
•  Other policies and other
facilities/projects
!  Natural Catastrophe Events
•  Globally and locally
!  Loss History
•  Owner/Project Developer
•  Contractor
!  Relationships

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