Nicolas Zanen is responsible for trading LNG cargoes and for the marketing of Cheniere's US LNG export projects to the Asian markets.
Mr. Zanen has been in the energy industry for over 10 years, mostly in the LNG business. He joined Cheniere in 2007 and contributed to setting up and developing its LNG trading operations, including LNG re-export cargoes from its Sabine Pass LNG terminal. More recently, Mr Zanen led several long-term SPAs negotiations for Cheniere's Sabine Pass Liquefaction project. Prior to joining Cheniere, Mr. Zanen worked at SUEZ (now GDF-SUEZ) in various roles, including as LNG Trading Manager, in charge of global spot and short-term LNG trading for the company.
Mr. Zanen has an MBA from London Business School, holds a degree in Economics from the University of Brussels (ULB) and is a Certified Financial Analyst (from the European Federation of Financial Analysts Societies).
Ahead of his presentation on "The Emergence of U.S. LNG Exports and Its Impact on Global Gas Market Liquidity" at the 2nd Annual Gas Asia Summit, Mr. Zanen answers a few questions around the pricing paradigm for Asia's gas market, US exports, the impact emerging suppliers will have on US exports and Singapore's plans for a competitive licensing framework.
1. Do you foresee a shift in the pricing paradigm for Asian buyers?
Nicolas Zanen: Oil indexation continues to be the dominant pricing paradigm underpinning most LNG supply contracts in Asia. However, the mechanism has come under significant pressure recently as the spread between oil prices and gas prices in freely traded markets has widened. This price disparity was mainly triggered by a structural shift in the natural gas supply and demand balance, first caused by the global recession of 2009 then compounded by growth in the United States' natural gas production as a result of the unconventional gas revolution. In 2012 these factors coincided with geopolitical factors impacting the price of crude oil and rendering the price of gas linked to crude up to 3 times higher than gas traded on European hubs and 6 to 8 times more expensive than the price of gas traded in the U.S. This situation has triggered the "re-engineering" of many traditional long-term contracts, particularly in Europe, and further opened the door toward more liberalization in the global gas market.
The Fukushima disaster of March 2011 also spurred spot and short-term trade activity to fill in the supply gap created by Japan's nuclear plant shut-downs, and underscored the importance of transparent spot markets and flexibility in long-term contracts as mechanisms to manage these risks. Deliveries under spot and short-term contracts (duration below 4 years) represent more than 25% of the globally traded LNG volume today according to data from GIIGNL, and more than 70% of that is delivered to Asian markets.
These dynamics, along with the increasing irrelevance of crude oil as a substitute fuel for power generation, have encouraged established LNG buyers in Asia to consider alternative pricing mechanisms for gas supplies to meet their future demand needs. These buyers find Henry Hub indexed LNG especially attractive, not only because the current outlook for the Henry Hub price results in lower delivered costs, but also because of the benefits that diversification brings in reducing their portfolio volatility. Over the last two years, Asian buyers have been very active in securing Henry Hub pricing. For instance, Cheniere entered into long term LNG contracts indexed to Henry Hub with Asian buyers for 7 mpta from a total of about 20 mtpa sold from the Sabine Pass LNG plant. Of all the US LNG capacity already contracted for exports, about half is with Asian off-takers, representing more than 25 mtpa or about 1/6 of the volume currently imported in Asia.
2. Do you think the US faces a challenge from other emerging suppliers?
Nicolas Zanen: The US is on its way to becoming one of the top three LNG exporters in the world by the end of the decade. This is based on the new supply situation created by shale gas, which has provided an abundance of resources and sparked a production boom not seen in decades. From 2007 alone, dry gas output has surged 30%, while proved reserves increased by almost 40%. The latest estimates put total reserves at more than 100 years of current consumption, with more than 2.7 quadrillion cubic feet in the ground. At the same time, other regions and countries are showing significant potential, likely leading to the introduction of East Africa and Canada as LNG exporters. However, some of these projects face technical and economic challenges and are unlikely to offer flexible terms similar to those developed in the U.S. These emerging developments look set to follow the traditional model for LNG projects, where dedicated gas reserves underpin exports from the plants. This is vastly different from U.S. LNG projects, in which the market—not the project—invests to produce the gas. Because of this structural difference, US LNG projects require lower upfront investments and offer a different value proposition to LNG buyers. By offering Henry Hub price indexation, US projects extend the liquidity and flexibility of the US gas market into the LNG business and give customers 100% volume flexibility by allowing them to cancel loadings if the hub-based price becomes too high.
3. What are your thoughts on Canada's export plans, how will they impact the US?
Nicolas Zanen: As explained above, the Canadian LNG proposals follow a more traditional project structure than those being developed in the US. Some of the developers have said publically that they need oil indexed contracts with Asian buyers to underwrite their projects. Given their location on the West Coast of Canada, these projects are primarily targeting the Asian market, whereas the U.S. Gulf Coast projects are targeting a wider scope of customers. Assuming some of these plants get built in Canada, there could be great potential in the future for location swaps between the two areas, and for offtakers to rationalise their shipping schedules and enhance the trading margins available.
4. What are your views on Singapore opening its market and introducing competitive licenses?
Nicolas Zanen: Singapore is currently a relatively small market for LNG. But the country's ambition to push the Asian LNG market toward more liquidity by developing Singapore as an LNG trading hub will be beneficial for all LNG market participants. To this end, they have taken a number of initiatives to attract companies to set up trading desks, including low corporate tax on trading income, and are working on plans to offer several LNG related services, such as storage and reloading of LNG from the Singapore LNG terminal. We therefore follow Singapore's progress with a great deal of interest and we welcome these initiatives to boost liquidity in the LNG market. These developments are very much in line with the commercial principles that underline everything we do at Cheniere, which is to promote a more liquid and transparent LNG market.
This interview is part of a series of insights produced by dmg :: events. To receive information of future podcasts and interviews or to contribute to future insights, please contact Michael Cluskey at +44 (0) 203 615 2862 or email michaelcluskey@dmgevents.com.