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A global supply surfeit made 2016 a bad year to sell LNG but a good one to buy it

Everyone said the liquefied natural gas glut was coming. In 2016, it came. For many producers it was the bleakest year in memory. Supplies soared. Prices plunged. Consumers took control of the market, feasting on cheap cargoes and hassling exporters into generous new contract terms.

American LNG set sail for the first time from the Lower 48. Australia's projects sent an armada of carriers towards Asia. Around 30m tonnes a year of new capacity had started up in the first 10 months of the year - a 10% increase. It was just the start of an onslaught that, by the end of 2017, will have added the equivalent of another Qatar to supply.

Big importers - China, India, the EU and Latin American nations - built new regasification plants to handle all this. But economic weakness kept actual demand in check. Consumers just couldn't keep up with producers.

The trend was underway in 2015, when the world's trade in LNG rose by just 4.7m tonnes compared with the previous year - growth of a miserly 2% or so. (The full figure for 2016 isn't in yet, but probably won't cheer exporters either.)

Supply wasn't the only problem. The phased restart of Japan's nuclear reactors - shut after 2011's Fukushima Daichii accident - was one culprit. More nuclear meant less gas in the world's biggest LNG importer.

The surfeit was good news in Europe, as exporters diverted cargoes once destined for Asian buyers to the Atlantic basin. New markets emerged in countries like Poland, where the availability of LNG gave impetus to plans to cut Russian gas imports. Other East European countries talked of new import facilities. Older exporters, like Qatar, upped supplies to Europe. Spain was the first European country to import a cargo from the US Gulf.

The big shift in 2016 was LNG's transition into a buyer's market. As average spot prices in Asia slid below $5 per million British thermal units early in the year, canny importers pounced. India, rapidly scaling up its LNG infrastructure, made the biggest headlines. Petronet LNG demanded - and got - the renegotiation of its 25-year supply contract with Qatar's RasGas on highly favourable terms. The deal was significant not just for India's aggression but Qatar's willing: 2016 was the year the emirate at last showed some flexibility in its marketing strategy.

Yet thanks to decisions made when prices were high, producers could only keep adding to the glut. The lion's share came from Australia, where some 18m t/y was scheduled to come online in 2016. This included the first two trains of the Chevron-led Gorgon project in Western Australia and second trains for two of the three projects on Curtis Island, Queensland - Origin Energy and Conoco Phillips's Australia Pacific LNG, and Santos's GLNG. The third, Shell's Queensland Curtis LNG, already had two trains up and running by the start of the year.

But the true era-marker came from America, where shale gas went global. The first train at Cheniere Energy's Sabine Pass facility in Louisiana started up in February. Shipments from the second train began in August. Work on three more - all due to being exporting in 2017-19 - got underway.

By comparison, the long-heralded arrival of floating LNG was more muted. Petronas moved ahead with the technology in May, when an FLNG vessel moved into position on the Kanowit gasfield, off Sarawak. Shell's 3.6m-t/y Prelude FLNG vessel is now scheduled to be installed off Western Australia in 2018. Developers in East and West Africa also talked of FLNG as a way of developing their resources.

But only the brave were even thinking of new projects. A plethora of developers on Canada's west coast sat on their hands in 2016, in no rush to commit capital to create more supply in a down market. Mozambique and Tanzania showed similar restraint. Investors talked hopefully of demand catching up with supply in the mid-2020s.

The year offered some glimmers of that hope. Across Asia, smaller consumer countries, lured by cheap and flexible LNG, began plans to deploy floating storage and regasification units. Egypt, short of energy - and a few years away from exploiting its own big discoveries - imported more gas through such infrastructure. Some markets began moves to use more gas in transport. New climate rules also encouraged gas producers to think their product might start pushing out coal. Such green shoots of recovery were visible to some, but, for many, remained hard to see amid the gloom of the glut.

This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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