Project Development & Finance

Competition, Commoditisation & Consolidation

Shearman & Sterling LLP

Issue link: https://digital.shearman.com/i/1170150

Contents of this Issue

Navigation

Page 1 of 15

2 Competition, Commoditisation & Consolidation T his report sets out to answer the question: "What might the LNG industry look like in five years and ten years from now?" In particular, how is it likely to be re-shaped by corporate activity – such as mergers and acquisitions (M&A) – as the growing number of players seek to maximise value by adapting to the forces re-shaping the industry? These forces can be grouped into three categories: competition, commoditisation and consolidation. COMPETITION LNG is expected to continue growing exponentially. Shell forecasts annual growth of 4% to 2035. This will drive M&A activity as the number and diversity of sellers, buyers and intermediaries grow, and players compete to build scale, as our article on p3 explains. Natural gas is projected to be the fastest growing energy source as it competes against coal and oil, and partners with renewables in electricity. Strong growth is expected even if determined action is taken to tackle climate change. So the LNG industry appears to have a bright future, despite the rise of activism against the use of fossil fuels, an issue explored on p6. COMMODITISATION The LNG industry is in transition, moving from an inflexible past to a commoditised future, raising questions over how projects will be financed. Recent concerns have eased because of the number of final investment decisions being reached during 2019. It nevertheless remains the case that, to secure project finance, liquefaction ventures need to cover their output with long-term Sales and Purchase Agreements (SPAs) or convince partners to proceed on an equity-lifting basis. Our article on p7 concludes that we are still some way from a world in which lenders will be comfortable financing a project on the basis of spot and short-term sales. CONSOLIDATION We have already seen significant consolidation in the LNG business, especially on the part of Shell and Total, the two largest portfolio players. The clear lesson, as our article on p11 explains, is that diversity and scale bring significant advantages in today's global LNG market. Over the next five years, we expect trade volumes to increase and for the diversity and number of companies in the LNG sector to grow, driving M&A activity. Beyond that, much will depend on energy and climate policy evolution, and technology advances – both highly uncertain. Proven decarbonisation solutions, such as coal-to-gas switching, will remain vital. Foreword

Articles in this issue

view archives of Project Development & Finance - Competition, Commoditisation & Consolidation