Related Articles
Forward article link
Share PDF with colleagues

Reality bites Asian LNG buyers over US supply

Asia are slowly waking up to the fact that new supplies from North America will not be cheap – and nor will they flood the market anytime soon

Over the past two years, the debate among buyers in Asia has shifted from an assumption that access to North American gas is cheap to a realisation that it’s a means of developing a portfolio of pricing exposure, Dr Anthony Barker, BG Group’s general manager in Singapore, told Petroleum Economist.

“Rather than search for lower prices, it’s now an informed approach to diversify exposure to particular indices, which we think is healthy,” says Barker.

Buyers in Asia have been overwhelmed with projections for US exports based on relatively low Henry Hub gas prices. The latest numbers suggest potential exports of 300 million tonnes per year (t/y). But in reality only 18m t/y is actually being built now.

Even if the market factors in the estimated 50m to 60m t/y predicted to be exported from the US by 2025, new projects in Canada and East Africa still need approval to help narrow the supply-demand gap, but they will not eliminate it, adds Barker.

Energy research firm Wood Mackenzie says high spot prices and tight LNG supplies could persist in Asia-Pacific beyond 2020. Producers, including BG, expect the market to remain tight until 2025.

Beyond 2025, there is the possibility that the successful development of China shale will influence a major portion of the supply/demand balance. But while Barker does not expect to see large-scale Chinese shale-gas development before 2025, it still remains a wild card.

Roger Bounds, global head of LNG at Shell told the CWC Asia Pacific LNG summit that “to avoid a tight market we need more confidence in long-term pricing behavior to enable investment”.

Another challenge is that buyers perceive the market will be over-supplied. The general consensus is that prices and supplies will ease around 2018 as new production comes online.

But the industry’s track record at delivering projects on time is notoriously bad. And with the highly capital intensive nature of LNG developments, particularly those mooted in Canada and East Africa, a high degree of off-take needs to be committed before they can push forward. “Ultimately it’s the pace at which buyers contract that will dictate the flows coming in,” says Barker.

However, policy and regulatory uncertainty in Japan and South Korea – the world’s biggest importers of LNG – could delay buying decisions, says Wood Mackenzie.

With capital-intensive projects predominantly requiring oil-based pricing structures to proceed, BG expects oil indexation to prevail within the Asian market. “And that’s understood by the customer,” adds Barker.

Interestingly, traditional buyers are working their way further up the energy chain. “We’re pleased to see that appetite and are seeking more partnerships at an earlier stage, particularly for our pre-[final investment decision] North American and Tanzania projects, as well as potentially a third train in Australia,” says Barker.

But Philip Olivier, president of GDF Suez LNG, cautioned delegates at the summit that as more buyers enter the upstream there would be greater pressure on their balance sheets, but not the deep liquidity in the markets if they were forced to sell.

Also in this section
Southeast Europe bets on gas
13 August 2020
Greece and Bulgaria plan dashes for gas to fuel cleaner energy futures
Aramco advances plan to lease out pipelines
5 August 2020
The cash-strapped Saudi NOC is looking to replicate the recent divestment success of its Emirati counterpart Adnoc
ExxonMobil announces Power Play finalists
4 August 2020
Community voting is now open across the three categories for the awards, which champion inclusion and diversity by celebrating remarkable women and men in the LNG industry