This question invites an almost self-explanatory answer. The Bahamas lies at its northern-most point 50 miles off the coast of Florida, which would be a major consumer market for the LNG commodity. This confirms a proposition which I have advanced here in the Bahamas for three years now: that Florida (Haiti & Cuba) and its changing demographics is the future of Bahamian economic expansion.
The Bahamas location offers supply-chain solutions, which in turn offer profit margin improvements and technically, energy management opportunities, which when coupled with forecasted demand, optimisation of distribution, and manufacturing cycles can impact a company’s bottom line significantly.
Importantly, the Bahamas has a long tradition of foreign direct investment. Capital investments are reliant upon a stable government that facilitates the investment process and assists in managing the investment risk profile. One key element in any strategy for shipping from the Bahamas is that it is a potential insulator, or hedge, against global economic downturn. This will be oftentimes a greater benefit for the Bahamas than any particular investor using its location. Because of the population size, the movement of goods out of the Bahamas ensures jobs, economic and commercial activity. As such, in many cases, the Bahamian worker is insulated from the direct effects of economic downturns; in the sense that there are more dominos to fall before the direct consequences of economic shocks are felt prominently. (I know there are examples of direct effects of economic downturns, but there are efficiency and policy reasons for that which cannot be addressed here).
In economic terms, the comparative advantage of the Bahamas is partly that the demand of the product being facilitated here has a positive disproportion to the operational costs. Though this is not always the case, for the Bahamas it is one of the unique geo-economic considerations for investing here which is to the advantage of Bahamians.
Let us examine more closely the possibilities for the Bahamas in the context of Grand Bahama. Grand Bahama has seen some of the most significant industrial development on the eastern seaboard of the Americas leading into the Caribbean Basin. The Bahamas Oil Refining Company (BORCO) and Syntex Pharmaceuticals employed and trained large numbers of Bahamian professionals over a number of decades. This becomes particularly significant in consideration of the trained skill and talent pool in Grand Bahama.
This means that in Grand Bahama, one can expect a talent pool of individuals who can speak with experience about industrial development and safety. This is a professional community which could underpin the establishment of an LNG facility. Moreover, these past employees will have had decades of safety training at the highest levels of industry standards. They will have participated in drills and simulations which are essential to the safety instinct in any industrial quarter. They understand chemical component analysis and are able to judge even usual or novel safety apparatus and their potential contribution to greater safety, or to the environment in general. If one begins with the assumption that no investor would willingly operate an unsafe facility, the costs of which are astronomical – with consequences in other jurisdictions – in the case of a significant safety failure incident, then the additional benefit of a community including persons with professional experience of industrial safety is an added value, which not only protects the environment but jobs and investment. This is part of what Freeport offers.
Freeport Harbour offers further distinct advantages in shipping. There are extremely few deep water entry points with available land along the Florida coast for a facility such as this. The shipping opportunities, in addition to a pipeline, represents a means of extending product lines offered from the Bahamas. There are currently around 130 LNG ships in operation, with over 50 more planned or under construction. Most existing ships have a capacity of 120,000 m3 to 140,000 m3, although there are a number of smaller ships delivering gas to medium-sized gas distributors in Japan and to terminals in Spain, France and Italy that cannot receive large ships. This opens an opportunity in the Bahamas and determines the project’s viability over several years.
The lifespan of an LNG ship has been extended from the design expectations of 20 years and there are now a number of ships of over 20 or even 30 years’ operation. The total LNG fleet capacity has increased steadily from the first ships in service in 1962, reaching over 14 mcm by 2001. These developments in shipping are maybe a source of additional valu- added business for ship maintenance enterprises currently ongoing in Grand Bahama.
Because of its location, the Bahamas, and Grand Bahama, in particular, also offer swifter movement into the marketplace, and possibly -in the future – an energy trading platform through which the world may then buy and sell from the Bahamas. Short-term LNG trades may follow a variety of pricing structures, including indexation to crude oil or oil product prices, or netback from pipeline gas prices. In the Atlantic basin the proximity between the US and European markets provides sellers and buyers with an opportunity to arbitrage prices and divert LNG cargoes to attract the highest price.
Analysis of deliveries from the Atlantic LNG plant in Trinidad shows that when prices in the US are above European prices, deliveries will be diverted to the US from Spain, whereas the situation reverses when European prices are above US prices. The main factors needed for the expansion of short-term trading are surplus LNG supply, market demand and receiving capacity, uncommitted ships, and flexible contracts. The emergence of a buyers’ market and increased short-term trading is changing the structure of the LNG market, including increased flexibility in contracts and increasing volumes of uncommitted liquefaction and transportation capacity. Sellers are learning to deal with new types of buyers, as new players such as Independent Power Producers (IPPs) and new entrant suppliers seek to secure gas supplies in now liberalized gas markets.
The development of short-term LNG trading will continue. However, the market is likely to remain largely dependent on long-term contracts in the medium to long-term horizon. This guarantees to some extent the initial opportunities available to new market entrants, while placing them in position to influence new developments. This should suggest to the reader that the market for LNG is a viable one. The future is likely to owe much to three emergent trends. * Changes in downstream markets and the emergence of new markets that are forcing buyers to seek much more flexible supplies than in the past. * Reductions in the costs of LNG to the point where it is already competitive with pipeline gas in a number of growing markets. * The development of short-term LNG trading and the flexibility this gives for LNG players to improve returns on investment and exploit and further develop niche market opportunities.
There are other benefits for those who can see the larger picture: at the current time, the only real constraint on the further development of short-term trading are the shortage of uncommitted ships and the lack of flexibility in existing contracts. This means that enterprising young lawyers may undertake to train themselves in these areas, (international trade, shipping law and marine insurance, documentary credits, and cross-border contracts) as a means of exploiting further added valued opportunities that may arise from these enterprises.
Given these factors, the short-term LNG market is expected to expand somewhat in the medium-term. However, the large investments and commitments required for the construction of LNG plants, ships and terminals is likely to put Grand Bahama in the driver’s seat if it can exploit the variety of opportunities being made available.
Dr. Gilbert Morris
April 20, 2004
