Commentary: 10 challenges faced by the global LNG market

Fuel Fix ^ | August 27, 2015 | Matt Smith

[thackney]

We recently looked at the restart of the first Japanese nuclear reactor in four years, and assessed its impact on Japanese oil demand. It was somewhat burying the lede, however, not to address the impact on LNG demand. So with Japan’s developments still fresh in our minds, here are ten challenges faced by the global LNG market:

1) Asia is the key market for LNG. Japan accounts for approximately 35% of the global LNG market. Combined with South Korea, it accounts for ~50% of it, while Asia as a whole accounts for 75%. The gradual return of nuclear reactors in Japan will mean depleted demand for LNG, which has accounted for ~50% of its generation mix in the last few years.

2) Even though Asian LNG demand accounts for a huge share of the global market, LNG comprises a very small piece of total Asian energy consumption. As countries such as China and India shift away from coal, LNG will be the go-to fuel to help fill this supply gap, spurring on a serious bout of demand:

3) While the extent of returning nuclear energy in Japan is still relatively unknown, should we see the return of 5-7 nuclear reactors by 2017, this would mean ~11.5 gigawatts of electricity returning to the grid. This could displace approximately 10.9 million tons of LNG (1.45 Bcf/d), the equivalent of 12% of the country’s LNG imports last year.

4) This return in nuclear power would come at a time when significant new LNG capacity is coming to market. LNG exports from the US are set to start in the coming months, kicked off by Sabine Pass. In total, 77 bcma (7.5 Bcf/d) of LNG projects are under construction in the US: Sabine Pass, Corpus Christi, Freeport, Dominion Cove Point, and Cameron LNG. To put this expansion in context, current global LNG demand is ~32 Bcf/d.

5) Rising supply is coming to market at a time when oil, natural gas, and LNG prices have crumbled. Given the nature of oil-indexed LNG contracts, oil prices at $100 reflected through to an Asian LNG price of around $15/MMBtu. However, due to a combination of lower demand and lower oil prices, Asian LNG prices have dropped well below $10/MMBtu, and below the threshold needed for US LNG exports to be profitable. This implied break-even cost to deliver LNG to Asia is seen at $10.50, given current US natural gas prices. Based on current forward prices, US exports are not economical:

There is, however, a strong argument to be made for US LNG exports, regardless of the current price predicament, and this lies with diversification. For both Asian and European markets, long-term agreements for US exports provide a hedge against potential geopolitical tension. After all, Qatar – the largest LNG exporter in the world – exports 10 Bcf/d through the Strait of Hormuz, the most strategic strait in the world.

6) Australia has invested the most into LNG, however, with an incredibly unfortunate sense of timing. It has invested around $200 billion in the past few years to massively expand its LNG capacity through eight new projects, with a total of 8.2 Bcf/d (85 bcma) in the process of coming online by 2018.

This will more than quadruple Australia’s LNG output, ushering it to challenge Qatar as the world’s largest producer. Given its proximity to Asia, increasing Australian exports will find their way to meet higher demand in the coming years from the likes of China and India.

7) While the below chart is rather hectic, it serves to highlight the influence that oil prices have on oil-indexed LNG prices. Given the likelihood for lower oil prices in the coming years, combined with an influx of new LNG export capacity, Asian LNG prices should remain much closer to $10/MMBtu than the $15/MMBtu seen for the past four years:

8) Although supply is charging higher, demand is expected to do the same. Asia is expected to lead the charge, with emphasis on China and India. Oxford Energy’s high case scenario projects that demand growth from the region could nearly double by 2030.

9) Russia is set to be the wildcard in relation to LNG demand in Europe. An increasing focus on renewables for power generation, in combination with higher natural gas costs, have meant that total natural gas demand in Europe is in structural decline. That said, European domestic production is concurrently in structural decline also.

Europe will likely continue to lean on Russia for pipeline flows, as Russia continues to show increasing flexibility in its contracts, moving away from both take-or-pay agreements and oil-indexed contracts. But as long as Putin looks to maintain a Russian sphere of influence, it makes sense for Europe to pursue other options – through LNG or otherwise – to keep the marketplace competitive.

With this in mind, and as weak global LNG fundamentals persist, Europe will hold on its title in the coming years of being ‘market of last resort’, pulling in excess LNG cargoes when there is nowhere else for them to go.

10) Given that Australia and the US are looking to challenge the supremacy of Qatar as the global leader of LNG exports, it is looking to raise its game. Qatar is adapting its contracts to become more competitive with its leading consumers – who are, not surprisingly: Japan, South Korea and India.

Costs are low for Qatar; production and liquefaction costs are seen at $2/MMBtu, compared to a number closer to $12/MMBtu for planned projects in Australia. This leaves them at a distinct competitive advantage – and one they are looking to use as further LNG capacity hits the market in the coming years.

There are considerable challenges faced by the LNG market in the coming years. After prices have plunged lower in the last year due to falling oil prices and stymied demand, the market is going to have to adapt going forward to greater international competition amid both rising demand and rising supply. With the expectation for supply to outpace demand through the rest of the decade – amid a lower price environment to boot – it would seem that the future for LNG exports looks brighter from a consumer’s point of view, than for a producer.

[thackney]

[bestintxas]

I note that Item 6 misleads by implying strongly that the country of Australia invested the $200bn. It was done almost exclusively by oil companies.

Nowhere in this article did I read about the increasingly environmental aspect of LNG: it is a preferred resource due to its ‘clean’ footprint compared to coal, nuclear.

My prediction is that Qatar will suffer as it is enveloped in the ME quagmire. Just too much money in fixed facilities subject to terrorism or bombing.

Australia will be in better shape due to its relatively docile nature. USA just has too much usage to justify itself as a major exporter.

I would bet on the land down under.