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LNG growth threatened by supply glut

Weak prices and short-term abundance are threatening longer-term LNG supply growth. Demand needs to pick up

The world's liquefied natural gas business is facing a period of “boom and bust” as a glut in supply and depression in prices dissuade new investment in production capacity, say industry leaders.  

Although US and Australian plants will soon pour more LNG into an already-well-supplied market, the prospects for supply growth after 2020 are diminishing as developers hold off sanctioning new projects, says David Ledesma, an LNG consultant at the Oxford Institute for Energy Studies.

By 2025 the dearth of new project approvals could leave an LNG supply shortfall of around 125m-150m tonnes a year. Falling LNG prices are to blame. No new final-investment decisions (FIDs) will be taken in the prevailing climate, Ledesma told the International Petroleum Week conference in London in mid-February. “And unless we get our capital costs down, we’re going to have a real problem taking FIDs in the future.”

High construction costs aren’t helping the outlook either. LNG-export projects can cost up to $2,000-3,000 per installed tonne ($/t) to build. Labour comprises around half of total LNG industry costs. Shell cancelled its $20bn Arrow LNG project last year as crude prices slumped and the company announced plans to cut capital expenditure by 20% from 2014 levels.

If the longer-term outlook is cloudy, the short-term one is clear: more supply. Energy Aspects, a consultancy, expects exports to reach 257.9m tonnes this year, up from 233.4m last year. Next year, the total will rise again, to 305.7m tonnes.

Australia and Asia will provide almost 99m tonnes of LNG supply this year, while the Middle East (mainly Qatar) will export almost 88m tonnes. US supplies - Cheniere Energy’s Sabine Pass plant will start shipping immintently - will account for almost 21m tonnes, Energy Aspects predicts.

Australia will be behind the biggest short-term shift, adding 62m tonnes to supply - all destined for Asian markets under long-term contracts. “The trouble is that market isn’t growing,” Ledesma says. Australian LNG will only replace Middle Eastern supplies.

The first LNG cargo from the US lower 48 is expected to leave Cheniere’s Sabine Pass gasification plant in Louisiana later this month. Sabine Pass’s first 4.5m tonnes-a-year (t/y) train will be followed by three more trains coming online every six to nine months, eventually bringing total capacity to 18m t/y.

LNG exports and demand

More LNG from Angola and possibly even Yemen could also add to supply. Over 2016 and 2017, Energy Aspects expects LNG volumes sent to Europe to increase by 54m tonnes (10m more tonnes in 2016 and another 44m tonnes in 2017). The US will account for 18m tonnes of this.

It makes Europe, not Asia, the “battleground” for gas exporters in the coming years, says Ledesma. Contract renewals elsewhere will account for some of the extra gas but the remainder will end up in northwest Europe, he predicts. “LNG supply will go to the place with the highest value and when you’ve got 50% of it trading on spot market that’s going to depress prices.”

Market forces While LNG supply is increasing in the short-term, demand growth is slowing, which is capping prices. Energy Aspects has cut its forecast for demand growth this year by about 13%, saying the world will only need another 20m tonnes of LNG this year.

In 2014 global gas demand increased by just 0.4%, reaching around 3.39 trillion cubic metres, according to Cedigaz data. Over the past decade, global demand rose by an average of 2.4% per year.

Growth in Asian gas demand - so strong in the past it was once the cornerstone of the International Energy Agency’s “Golden Age For Gas” forecast - is slowing, rising by just 2% in 2014, reaching 678.6 billion cm. Demand rose by 3% each year in the two years before.

Over 2016 and 2017, Energy Aspects expects Asian LNG demand will grow by just 7.1m tonnes (around 2%) each year. This will be driven by China, India, and Pakistan, which will compensate for reductions in demand from South Korea and Japan.

Meanwhile Europe’s gas demand fell for the fourth consecutive year in 2014, down to just over 1 trillion cm, Cedigaz says. This is around 5% lower than a year earlier, and down from a high of 1.136 trillion cm in 2008. Europe’s financial woes, cheap coal prices and confusing government energy policies have all depressed consumption.

The fundamentals have driven down prices. At the beginning of January, spot LNG could be bought for $5.70 per million British thermal units in Europe and $6.40/m Btu in east Asia, according to Argus Media, a pricing agency. In February 2014, prices reached $20/m Btu in Japan. As Petroleum Economist went to press, front-month Henry Hub futures were trading around $1.90/m Btu, down from around $2.20/m Btu a month earlier. Delivered Northeast Asian LNG prices fell from over $7/m Btu at the start of January to just over $5/m Btu at the end of the month. Mild weather and cheap crude oil, against which much LNG is priced, were to blame.

Energy Aspects forecasts average prices for Northeast Asian gas will fall to $4.3/m Btu this year while 2017 prices are could tumble to down to just $3.7m Btu. Indeed, by that time Northeast Asian LNG prices could even trade at a discount to LNG prices in northern Europe. Summer 2017 could even see the arbitrage window between the US and European hubs start to close, particularly if Henry Hub prices have drifted upwards.

Andrew Walker, Cheniere’s head of strategy, says the plunge in the oil market, not a surfeit of LNG, is the culprit for collapsing seaborne gas prices. “Significant volumes haven’t come online yet. We haven’t seen a flood of product coming into Europe.” LNG prices will be weak until oil prices go up, he believes.

But he too is sounding the alarm about investment. Only strong projects can survive the price depression and unless prices rise new developments are not going to be sanctioned.

Walker hopes that as lower-priced US LNG starts to reach consumers will respond, pushing up demand. “But at some point we must come back to the long-term costs of supply or there will be no new projects,” he told the IP Week conference. “There’s a difference between the near-term and the long-term. And as we look at the market with doom and gloom, we underestimate some important things like the demand response. The US is going to be a key driver of that.”

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