Outlook for worldwide LNG markets: economic and international factors

Outlook for worldwide LNG markets: economic and international factors

Introduction

The global LNG trade doubled its size every 10 years from 53 MTPA in 1990 to 100 MTPA in 2000, and again doubling 217 MTPA in 2010. In 2015 LNG trade in total reached 244.8 MTPA, up 4.7 MTPA from 2014 and the largest year ever for LNG trade, surpassing the previous high of 241.5 MTPA set in 2011. During the 24-year period from 1990 to 2014, international natural trade gas grew by 5.1% per year on average, whereas international LNG trade grew by much greater 6.3% per year. The numbers of LNG importing and exporting countries have also grown steadily from 9 importing in 1990 to 33 in 2015 adding Jordan, Pakistan, Poland and Egypt – the first importer in Africa – to the list of importing countries. In 1990 there were 8 exporting countries and as of 2015 only 17 countries exported LNG down from 19 in 2014 (Angola and Egypt, which were shut down for repair work and feedstock loss, respectively)^[1]. 

Over the period to 2020, LNG supply will be overwhelmingly determined by the production from projects currently in operation and under construction since it typically takes around four years to construct a new large-scale liquefaction plant. After 2020, the growth in supply will mainly come from projects currently at the planning stage. A record level of just over 700 MTPA of new capacity has been proposed, three quarters of which is in North America, where developers have been looking to take advantage of low natural gas prices and increasing production resulting from the shale gas revolution as is driving a dramatic restructuring of global natural gas markets, not only creating hopes for replicating the Canadian and US successes in similar shale formations outside North America, but also creating opportunities and incentives for moving “surplus” lower-cost Canadian and US natural gas into higher-value global markets via LNG exports. This revolution—combined with increases in liquefaction and regasification capacity as well as the development of FSRUs and new strategies for overcoming capital constraints—will likely precipitate a shift in the global LNG market away from contracts with fixed prices pegged to Brent and towards a more flexible, mature market with a spot price closer to Henry Hub.

Shale Gas Revolution on the LNG market

The US shale revolution – the innovative drilling technology that frees gas trapped in vast shale rock formations – has allowed the US to gradually shift from being a gas importer to a net exporter. Many terminal operators have focused on adding export liquefaction capacity to take advantage of the shale gas boom; with 5 new land-based liquefaction projects entering in production between 2016 and 2018 along with abundant shale gas, the USA will position themselves ahead of Qatar as the largest producer of flexible LNG in the world and will increase demand in the basins of the Atlantic and Pacific. By 2019, USA will have 9.6 billion cubic feet per day to export (9 times the volume of the Bolivia/Brazil contract at maximum capacity)^[2].

Thanks to the vast supplies unleashed by the shale revolution, the spot price of gas in Asia has plunged. The drop in Asian prices has brought the cost of natural gas traded in different parts of the world closer to each other. America’s Henry Hub benchmark is by far the world’s cheapest, at just over $2.5 per million British thermal units (MBTU). In Europe and Asia they are a dollar or two higher. A few years ago the range would have been much wider, from $5 at Henry Hub to $19 in Asia. Therefore, shale is having an enormous impact on how LNG is sold, prompting spot trading in lieu of long-term contracts^[3].

Current and Proposed Global Liquefaction Capacity

In 2015 global liquefaction nameplate capacity reached 301.5 MTPA as two new projects began commercial operations: the 8.5 MTPA Queensland Curtis LNG (QCLNG) project in Australia and the 2 MTPA Donggi-Senoro plant in Indonesia. Gladstone LNG (GLNG) in Australia also sent out commissioning cargoes in 2015, and commercial operations commenced in 2016. Arun LNG in Indonesia transitioned to an import terminal in early 2015 after the final two trains were decommissioned in late 2014, while Algeria’s Skikda plant decommissioned two trains in early 2014. A further 142 MTPA of liquefaction capacity was under construction world-wide as of January 2016. Final investment decisions (FID) occurred for a combined 20 MTPA at Sabine Pass T5, Corpus Christi T1-2, Freeport LNG T3, and Cameroon FLNG^[4].

There is a long list of planned projects targeting the expected requirement for additional LNG supply after 2020 to meet growing demand and offset the expected reduction in output from some of the operating projects. If all were developed they would add over 890 MPTA^[5]  to global LNG capacity, several times more than any realistic assessment of what will be needed. Over three-quarters of the planned projects are in North America as companies attempt to take advantage of the abundant gas resources and low natural gas prices to join the rush to export LNG. However, taking into account of those projects currently under construction, the global LNG production capacity is expected to reach 400 million tons per year by 2020. In addition to the United States and Australia, major LNG production projects are proposed in East Africa and Canada. As a consequence, there will be strong competition between the sponsors of projects to secure the long-term commitment to the output that they need to underpin the investment.

Global Regasification

According the World LNG Report – a flagship publication of International Gas Union – “Global onshore and floating regasification capacity reached 757 MTPA in 2015. The year saw the majority of new terminals constructed in emerging markets, including Egypt, Jordan and Pakistan, though the world’s largest importer – Japan – did bring online two new terminals. In addition to the three markets above, which brought the number of countries with regasification capacity to 33, Poland received its first commissioning cargo in December 2015. As of January 2016, 15 new terminals were reported to be under construction, 8 of which are located in China, for an increase in total global capacity of 73 MTPA expected online by 2019^[6].” Global LNG demand by 2030 could be almost double that of 2012, reckons EY^[7]. The main reason is its growing use for power generation, chiefly in Asia. But new ways of using LNG are multiplying, notably in transport. For shipping, it is cleaner than heavy fuel oil, which is increasingly running into environmental restrictions. Already, 50 Norwegian vessels use LNG with hundreds more being built that use the fuel. Poland expects that 500 or more will be plying the Baltic in the next five years^[8]. 

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