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LNG demand to rise, but supply in question

There's a glut now, but future demand growth can support huge export capacity increases—if the massive investment needed is forthcoming

Nameplate export capacity for liquefied natural gas around the world reached around 290m tonnes a year by end-2017, with around 60m t/y of that added since early 2016. Around 40m t/y extra is planned for this year and about the same again next year. These are impressive stats, but they're largely the product of investment before 2014, when the oil price crash, the growing likelihood of US LNG exports and sluggish short-term demand growth turned off the funding taps for big non-US projects. Capacity additions scheduled to come on stream in 2020 are well below 5m t/y.

If industry forecasts are to be believed, LNG capacity will need to double from current levels over the next 15-20 years to keep pace with demand. Asia and emerging markets in general are switching from burning coal, diesel and heavy fuel oil to gas in power stations.

Shell predicts in its LNG Outlook 2018 that demand will be running at around 500m t/y in 2030 and approaching 600m t/y by 2035. Bloomberg New Energy Finance (BNEF) goes for 490m t/y of global demand by 2030.

The US Energy Information Administration reckons global LNG trade is going to treble, between 2015 and 2040. That implies exporters will need to produce more than 600m t/y towards the end of that period-a similar forecast to the one ExxonMobil is using in its 2018 Outlook for Energy. BP, in its Energy Outlook 2018, sees LNG import demand in 2040 at around 550-600m t/y.

New investment cycle

But will exports actually rise to meet that potential demand?

BP says 40% of this predicted doubling in export capacity will be developed over the next five years. BNEF thinks projects adding 118m t/y are likely to reach final investment decisions in 2018-20, mostly in the US, Qatar, Mozambique and Papua New Guinea. However, the consultancy says global capacity will hit a peak of 396m t/y in 2021, with uncertainty over what happens next.

Shell echoes that view. While currently planned export plants will boost capacity to around 370-380m t/y in the early 2020s, it says. A failure to invest further could result in a decline in operational capacity to a little over 300m t/y, as older trains go off line.

As the world's largest LNG trader, Shell is committed to the market and clearly thinks it's an industry with legs. But it warns that, assuming there will be 500m t/y of potential LNG demand by 2030, there could be a 200m-t/y supply gap by then. This will widen further in the 2030s unless the industry puts in the necessary investment in plant expansions and greenfield developments. At a ballpark cost of around $1bn per 1m t/y of LNG capacity, that's at least $200bn—and that's before the cost of field developments and importers' regasification infrastructure.

Shell isn't guaranteeing it's going to lead the charge, following its big spending on Prelude FLNG-the largest floating structure to put to sea—and its plans for investment in export capacity on the US Gulf coast.

"Our investment cycle is coming to an end with Prelude coming on stream this year. We will have the space to take investment decisions… It doesn't necessarily mean we will spend the money," Maarten Wetselaar, Shell's head of integrated gas and new energies, said on launching the outlook, according to Reuters.

Do you feel lucky?

The problem for the industry is that grandiose predictions for gas consumption have failed to live up to previous hype. The Golden Age of Gas may be on the way, but it hasn't arrived at the pace being touted seven or eight years ago.

While supply from LNG capacity built pre-2014 may be gradually finding a home in a recovering market, there's no guarantee that 500-600m t/y of it will have the same luck in 10-15 years' time, whatever the forecasters say—or hope.

Cheaper renewables, improved energy storage, smarter grids and new gas pipelines could spell less demand for LNG from the electricity sector than expected. Big LNG investments in the 2020s will likely be dependent on assured returns in the 2040s and may not be the shoo-ins some think they are.

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