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LNG: gloomy now, brighter soon

LNG producers must have faith. The glut will pass and the market will need their gas

THE WORLD wanted more liquefied natural gas; the market responded. The wave of new supply, expected for years, is upon us. Global LNG export capacity is now 352.54m tonnes a year (t/y) and will rise to 357.84m t/y by the end of 2016; and 452.11m t/y by 2020, according to Petroleum Economist's Interactive World LNG Map. Supply will have risen by almost 30% in the space of five years.

Combined with weaker-than-expected demand in Asia and the oil-price slump, the supply abundance has depressed LNG prices - and changed the market.

Consumers are in charge, demanding new flexibility in their purchase contracts and, above all, cheaper gas. Less gas than expected is heading to Asia; more than expected will head to Europe. And LNG's destiny as a truly global commodity is in sight.

LNG's changing dynamics is the main theme of our special report this month. As the first cargoes from Australia's Gorgon and Louisiana's Sabine Pass set sail we assess what the shifting fundamentals mean for the market - and other hopeful producers. Plainly, a collapse in LNG prices from $18 per million British thermal units (Btu) two years ago to $7/m Btu now makes building projects - or finding the money for them - tricky. From Canada's west coast to Africa's east, developers are nervous. Casualties have mounted in Australia.

On 23 March, Woodside Petroleum confirmed that its $32bn Browse project would be shelved, just the latest project deferral. Even in the US, the emerging low-cost LNG producer, threats lurk. If Russia protects its market in Europe or coal prices remain low, up to half of new US capacity could sit idle in the coming years, forecasts energy consultancy Wood Mackenzie. Further expansions would be doubtful.

Despite 2016's glut the long-term picture says consumers will soak up the oversupply

But LNG has always been cyclical. Despite 2016's glut the long-term picture says consumers will soak up the oversupply and need new plants to export a fuel that will be central to the global economy this century. Gas demand continues to outpace that for other hydrocarbons: it will grow by 1.4% a year to 5.2 trillion cubic metres by 2040, says the International Energy Agency. LNG's will be even stronger, at 5-6% a year. Gas's future is bright, and its trade will increasingly happen by sea. It is a better bet than coal or even oil.

As LNG demand catches up - spurred by cheap prices, new consumers, floating regasification, the rise of gas in transportation, more electrification, and tighter emissions standards - the market will tighten by 2023, predicts consultancy Energy Aspects. That seems some way off, but as the near-term glut clears another 75m t/y of supply will be needed by 2025. To meet that need, the decisions to add capacity must be taken soon.

So for all the sector's gloom now, producers must look ahead; using the pause to find more liquefaction efficiency (think modular construction, floating LNG, brownfield expansions) and marketing flexibility (think shorter contracts, less oil indexation, hubs, derivatives). Developers must put their faith in the cycle, remembering it will turn. They must keep building, preparing the market for consumers that may not even yet be born.

For more from Petroleum Economist's in-depth report on the global LNG industry click on the links below.

A fungible tangible Latin America: demand dries up
Power to the buyers The European LNG dumping ground
Transport's energy of the future Big gloom in Asia, small promise
Floating LNG: drifting along West Africa and the East Med.: missing the boat
GoM LNG: there she blows Creeping along in East Africa
Rocky shores for Canada Qatari flexy time
Australia: the new super-producer emerges Russia's slow trains



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