Glimmers beyond the glut
Global exports are heading for a hefty surplus. It will take a brave developer to sanction a sizeable new plant without lining up buyers first
The gas liquefaction construction boom is here—millions of tonnes of capacity are coming on stream over the next two or three years from the US to Malaysia, the Russian Arctic to Australia. But it's not going to last. With supply poised to outstrip demand, some developers are delaying final investment decisions (FIDs) on fresh capacity until a rebalancing of the LNG market is in sight—and that is unlikely to happen before the early-to-mid-2020s.
More than 140m tonnes a year of global LNG capacity is due to be added between the start of 2016 and end-2019, with 51m t/y scheduled to start up this year alone, according to Energy Aspects, a consultancy. Much of this originates from Australia—which is set to surpass market leader Qatar's 77m t/y of LNG capacity this year—and the US, whose capacity is forecast to reach 65m t/y by the end of the decade.
Much of this capacity was sanctioned in the aftermath of the Fukushima disaster of March 2011, which prompted both a shutdown of all Japanese nuclear capacity while safety checks were carried out and a scramble among Japanese power companies to secure LNG import contracts. This, plus healthy gas demand growth in South Korea—the world's second-largest LNG importer after Japan—and the huge potential of the Chinese and Indian markets gave the sector a rosy-looking future.
But with Japanese demand now expected to fall, as nuclear plants come back on-line and flat demand in South Korea, the picture has changed. Increased demand from China, India and elsewhere can be expected to help fill the gap. But that needs installation of import and pipeline infrastructure so the countries can switch from coal to gas. This will take time.
The result is that many LNG developers are already retracting their horns and delaying the sanctioning of new capacity until they can be sure of finding buyers. The trend is clearly visible in the fall off in FIDs recently. Only two projects, adding around 6m t/y of new capacity, in Indonesia and the US, reached FID in 2016, the lowest figure since 2008, according to Wood Mackenzie.
At present, supply and demand in the global LNG market remains broadly in balance, even if nominal liquefaction capacity is higher. In the northern hemisphere winter, LNG demand in big importers such as Japan and South Korea has been enough to push spot prices up to a ceiling set largely by the cost of switching to oil for peaking in the power markets of northern Asia.
Meanwhile, in the shoulder season of April-May, as demand eases, the LNG market is expected to move to oversupply, with a falling price taking its lead from European demand, which is partly linked to the cost of coal-to-gas switching in the power sector.
But, while expectations of a cold 2016-17 winter in China and northern Asia, a recent spike in Japanese LNG demand and strong growth in emerging markets such as Pakistan and Egypt have all given a leg to the market, this state of affairs isn't going to last.
"The market is going to move into an oversupplied position through the back of 2017 and into 2018, but it won't really be until mid-2018 until we will see substantial oversupply coming into the market," says Giles Farrer, an LNG market analyst at consultancy Wood Mackenzie.
Export capacity already exceeds demand—a situation that isn't likely to change this decade. Oversupply will contribute to downward pressure on LNG prices around the globe next year and beyond. Energy Aspects forecasts that the average annual price of LNG into Japan in 2018 will be $4 per million British thermal units, compared to $5.5/m Btu in 2016.
The upshot of all this is that some LNG plants may not run at capacity for the next few years. In the US, despite the first cargoes reaching Asian markets from Sabine Pass through the Panama Canal this year, offtake is likely to be determined by prices in Europe and they may not always be attractive enough to warrant shipping all the LNG that buyers are entitled to take.
In Australia, companies are weighing up whether the economics stack up for the drilling of new coalbed methane (CBM) wells to provide feedstock for Queensland's LNG facilities, some of which have been running under capacity. Meanwhile, there is pressure to use more of the country's gas reserves for domestic consumption. Both factors could potentially limit feedstock supply to export facilities, though Wood Mackenzie thinks CBM drilling for export is likely to remain viable.
Few forecasters think the LNG market will return to a more balanced situation before the early-to-mid 2020s. "We think the window starts to reopen in 2023, but it will really take off in 2024-25. That's when big new trains will be required in the market," says Farrer.
In a recent report, Moody's said it expected the temporary excess of global supply to peak at around 55m t/y in 2019, with significant volumes of US LNG potentially destined for Europe, but that, as global demand and LNG import infrastructure caught up with supply, the market would rebalance in the early 2020s.
The timing of these estimates suggests the amount of export capacity getting to FID will remain limited until around 2019-20, though there will be some hotspots, such as the US and also East and West Africa, where floating LNG projects are being planned in Mozambique, Cameroon and Equatorial Guinea. Incremental capacity increases at existing plants, such as ExxonMobil's PNG LNG in Papua New Guinea and US plants, are also on the cards.
On the demand side, major LNG offtakers and portfolio players, such as Shell, Total, Engie and Gas Natural Fenosa, will be busy seeking to increase uptake in emerging markets. They have an expanding field to work in: 38 countries were importing LNG in 2016 compared with just 10 in 2008.
The main centres for LNG demand growth will be obvious ones, like China and India; but there is also likely to be significant market growth in some new and growing importers, such as Pakistan, Egypt, Caribbean countries and southeast European states.
Latin American countries are also likely to take more LNG, even if Brazilian LNG imports have fallen recently, due to higher than expected domestic hydropower generation. Colombia, Peru and Chile are among South American countries beefing up their regasification capacity.
Beyond 2020, a new LNG boom could be in the offing, but until then most investors are likely to be sitting on their hands waiting to seize the right moment to move.
This article is part of a report series on LNG. Next article: Reality bites for Canada