Claudio Steuer: "LNG market is the future"

The 24th Caspian International Oil & Gas Conference is being held at the Baku Expo Centre these days. Caspian Oil & Gas is supported by the Ministry of Energy and the State Oil Company of Azerbaijan (SOCAR). One of the participants of the conference, the founder and head of SyEnergy Claudio Steuer told Vestnik Kavkaza about the prospects for development of the liquefied gas market.

- What are the competitive advantages of LNG today over conventional energy sources?

- Let's think LNG as a flexible pipeline. You can essentially transport LNG to any country that has onshore terminal or offshore floating terminal. And if you look over the past 10 years, the number of countries that have become LNG importers have more than doubled because of lower cost and availability of terminals. That is point number one. Point number two, by having LNG terminal, especially a floating kind, you can bring gas consumption in area without a lot of gas infrastructure. Because otherwise you need a lot of pipelines to be in place. LNG can accelerate the consumption of gas into our energy production or industry, because there is no need to develop all your pipelines. Benefit number three is the flexibility.Let's say you are a client, and suddenly you have an economic recession, demand for gas is less. If you have an LNG contract, you can agree with an LNG supplier that you have flexibility to move up and down your requirements. Pipelines also have that. But if the situation is really bad, you can say: "Look, we need to take this gas to another LNG customer." Which is in the LNG world is called a diversion. So instead of going to your country A you would go to country B. And your agreement will have a commercial, legal, technical condition to agree how to share the additional premium if the gas goes to a higher-pay market, so you can make a profit. Or if there is a loss, if the gas goes to a low-pay market, you or the country that was supposed to buy your gas, pays the difference. But this difference is a lot smaller than having to pay 100-percent of the take of pay, which you would have to pay for the pipeline. So LNG gives operational and commercial flexibility, which pipelines do not provide.

- Which countries are more profitable to buy LNG today?

- That's a very important question, but also very difficult to answer, because LNG have two key things. You have a cost of liquefaction, which is higher in a country with an older infrastructure, country A has to make investment to produce LNG, so that is one element of cost. The other one is the cost to take LNG on a ship from country A to country B. And that again is a function of a distance. So if you buy LNG from a very far country, it's going to be expensive. Same way as if you buy gas from a 3,500-kilometer pipe, it's going to be expensive, because somebody has to pay for the infrastructure. So to answer your question rightly, you need to know exactly where this country is and do a study, which is to map all the cost of the nearby LNG projects, liquefaction cost and shipping cost to give you answer in order to provide the best contract or price from the country one, two and three. But again, LNG is not yet global commodity, it is sold and bought on a competitive basis. The supplier country is also looking at the market on competitive basis: where can I get best price or better margin for my LNG. So it is a dynamic situation, but it is possible to find yourself a good deal, but you need to do significant amount of homework and possibly have some assistance from people who know in detail how to do this kind of work.

- What is the lowest cost of LNG with delivery for today?

- I guess the best way is to name those countries which can be most competitive. For example, Qatar, because it has the largest gas field in the world and it is cheap to produce gas from Qatar. Also because Qatar has a lot of liquids, I' taking about condensate and LNG, which pay a significant contribution for the project. So, I would say that Qatar is the lowest-cost and most efficient producer of LNG. If you are in a very distant country, for example, Japan, Qatar can still be competitive. But if you buy LNG from Indonesia, or Alaska, or Australia, you're going less shipping distance than from Qatar. The question is can a local liquefaction plant in Australia, Indonesia and Alaska have a more competitive price than Qatar. Therefore, the answer to your question consists of two parts. Qatar has the lowest cost and has very large LNG carriers. That is, you need the lowest unit cost of shipping. Two very important elements to say that make it possible to say that Qatar is probably the most competitive. But it does not mean that they're going to give you the cheapest price, because they are commercial. They're going to charge whatever they think they can get away fro you.

- Is it possible to predict that LNG will eventually replace conventional energy sources and in which countries?

- LNG is growing three times faster than pipeline gas. Because again pipeline gas is fixed between point A and point B, and LNG is flexible. Second, now with lower cost of LNG receiving  terminals and small LNG capacity, now it's possible for countries that could not previously buy LNG before, now have an opportunity to buy it. Also LNG is substitute for diesel and gasoline in transportation. Slowly, but it happens. So, LNG is likely to continue to grow much faster than pipeline gas because of those elements I just mentioned. And a flexibility provides supplier and buyer to trade, to manage gas needs visa-vi economic activity or weather. Many countries have hydropower generation, they make investment in renewable energy. Natural gas has the flexibility to balance the intermittency of renewable energy. Better than anything else's. You asked me in which countries LNG is going to be bigger than pipeline gas. Perhaps I would look to the UK as a very good candidate to have a lot of dependence on LNG, because the North Sea production is going down and they are not investing in finding of large quantitative of gas. That's why the UK is trying to develop shale to have an internal source of energy. I expect in the near future LNG will continue to grow in the UK, and perhaps be even larger than natural gas supplies. But the UK can also supply gas from Groningen in the Netherlands and from Norway, which have significant reserves and pipelines to bring the gas to the UK. It also depends on the commercial relations with these two countries. I hope you understand that it is not so easy to give a clear answer, because there are many factors: dynamics, politics, commercial elements. But it is obvious that, for example, the UK wants to gain access to safe low-cost energy. And that's they are going to continue to do.

- What is your opinion for the Russian market in the future? Will the LNG market develop in Russia?

Russia has the largest gas reserves in the world. More than Qatar. I think that Vladimir Putin, his administration and Gazprom are very smart, very wise. They understand oil business is in a difficult situation, and they see that gas is growing faster than oil. They have important markets in Europe - Turkey, and the Far East - China, and also Japan. But let's also admit Russia has been slow in developing LNG business, given the size of gas reserves it possesses. So when Putin says, "I want to be number one" - it's an inspiration, is a desire. The question is how will Russia become number one in LNG, because it has a lot of challenges. The number one is supply domestic market, supply pipeline gas for Europe, supply pipeline gas for China and develop all those gas resources to accelerate LNG development and be number one. When Putin talks about the need to become the number one, he does not specify when it will happen. It's a nice statement, but without a clear target. I'm essentially looking to 2030 as a potential timeline. Is that achievable? The process requires significant central planning to achieve this goal, because now you have competition from the Eastern Mediterranean, East Africa, Qatar, Iran, the United States and Australia. So the message to Putin is: you only is going to be number one only if you can run faster than competitors. How can you run faster than competitors? You have to be very efficient. And you need to articulate a gas master plan to minimize costs of transportation to the  different markets. I believe Russia can do it because of its centralized element of the government and energy planning. But it's not easy, but I take Russia seriously. I think now they may become more friendly, cooperative with potential partners to develop LNG projects. Because they cannot do it alone. Recently, Gazprom and Shell announced cooperation o develop LNG projects. Shell is the number one in the world. Shell is a partner in Sakhalin LNG. Total is very close to Russia and also a very important LNG player. I think that the difficulty for Russia in achieving this is the Americans. They do not have a good relationship with Exxon, they do not have a good relationship with Chevron. Can you really become number one without having a good relationship with American companies? Yes and no, depends on who is in front of you. But if you have a good relationship with Shell, Total, BP, ENI and StatOil, then I think you can be a credible competitor.

- You said that Azerbaijan can become an LNG transport hub. What are your expectations from the LNG market in Azerbaijan?

- My main request from the sponsor and the organizer was to develop a paper, my vision as to how Azerbaijan could become a gas hub for the Caspian and its opportunities for developing LNG. That is, if I am advising the Azerbaijani government how would I do it. Of all the key elements of the gas hub the only thing missing for Azerbaijan is gas transportation with other Caspian countries. Maybe the best way for Baku to do such a project is to do the first phase by itself. I mean the Southern Corridor. It can attract Turkey, BP, some other international company, like NG from France attracted other major gas buyers, like NL from Italy or  Gas Natural from Spain, which can become partners because they are interested in LNG. That is, Azerbaijan faces the task of fulfilling the first phase of this project. The question is where to get 20 TCF (trillion cubic feet) of gas that are not tied to the domestic market, the Baku-Tbilisi-Ceyhan, TANAP and TAP projects. If you have that, Azerbaijan will not need Turkmenistan and Kazakhstan. They can do the first phase by itself. Of course, with the help of the European community, with the help of the major players in the oil and gas business in Azerbaijan, and of course, in cooperation with Turkey. I think Turkey would be interested, because it provides good economic value for the country. The construction in Salyan, a port, profit from the movement of ships. Also, Turkey wants more LNG. So, this concept has many positive elements.

I would recommend Azerbaijan to be courageous, do the first phase without other partners, because they will slow you down. It is much more difficult to bring Kazakhstan and Turkmenistan in the first phase of the project. If you do the first phase by yourself, they will want to participate in the second phase, because you will prove it works. And I think like I said the European community will see such a project as the Southern Corridor number two, but with an added flexibility, because there is flexible gas that can be delivered to countries that would never benefit from the Southern Corridor. I mean Portugal, Spain, France, Italy. And maybe, even the UK can buy some LNG from Salyan or the Caspian. And in this case, Europe will get an additional source of LNG without buying LNG or gas from Russia. It seems like a win-win situation