Too much LNG... for now
The global glut will persist in 2017, but recovery is only a few years away
The global liquefied natural gas market will remain oversupplied and LNG prices under pressure until the early part of the next decade. As a result, in 2017, sellers will be reluctant to commit more capital to an industry in which returns have fallen sharply. But, given the four-to-five-year time-scale for building LNG plants, the industry must anticipate the inevitable recovery and start sanctioning new liquefaction plants before the end of the decade.
A 15% increase in global capacity - with over 35m tonnes a year of new supply coming on stream - made 2016 predictably tricky for LNG. Australian projects featured prominently; LNG from America's Sabine Pass plant reached the market too - the first of a new wave of exports from North America.
At the same time, LNG consumption was generally weak, although lower prices did at least prompt a surge in demand from several emerging markets. Demand in China and India achieved double-digit growth in 2016, and Egypt, Pakistan and Jordan grew too.
With gas and oil markets depressed, LNG prices were low in 2016: spot LNG contract prices in Asia and Europe fell to $5 per million Btu and $4/mBtu, respectively. Things might have been worse given the scale of the supply glut. But teething problems at some of Western Australia's new LNG plants curbed physical supply, providing a degree of price support. Utilisation at Sabine Pass was also low.
Oversupply will persist in 2017, as 40m t/y of additional capacity comes on stream. In the first half of the year, Sabine Pass Trains 3 and 4 will ramp up and Wheatstone, followed by Ichthys and Yamal towards year-end, will also add to supply. Although Prelude, the world's first large-scale floating LNG plant, looks set to be delayed until 2018, capacity additions - the largest ever in one year - will continue to weigh on an already oversupplied market next year.
Demand growth should recover in 2017, rising back into double digits, after two years of weakness. That will start to clear the glut. The recovery will have a few sources. First, accelerating global GDP growth should boost demand for primary energy. Second, oil prices should recover to around $60 a barrel in 2017; contracted LNG prices will rise too, but with a time lag that will boost the competitiveness of LNG in the short term.
The LNG glut should also keep LNG spot cargoes attractively priced relative to other fuels. Third, colder temperatures in the northern hemisphere this winter, caused by the shift from el Niño to la Niña, will help boost demand, especially in northern Asia, where recent winters have been mild. Floating regasification technology, meanwhile, has helped unlock new markets in the Middle East and Latin America; almost 10% of global regasifaction capacity is now at sea and its share is likely to rise in 2017 and beyond.
Yet few new liquefaction projects will be sanctioned in 2017. Buyers are reluctant to contract large volumes without discounted prices, while suppliers will wait for market conditions to improve and costs to fall before deciding to build new capacity. In 2017, projects will largely involve debottlenecking, backfill and brownfield expansions - such as the revamp of Tangguh Train 3, the only major project sanctioned in 2016. The likeliest locations of greenfield LNG projects to be sanctioned in 2017 are Mozambique and - if Petronas decides to go ahead with Pacific North West LNG - western Canada. America could also add to liquefaction capacity. FLNG may continue to expand if, as seems likely, Italy's Eni approves the development of Mozambique's Coral LNG, the next big FLNG prospect.
LNG prices will also remain under pressure in 2017, although a crude-price recovery will lift oil-linked LNG contract prices towards $9/mBtu. The emergence of gas-pricing hubs in Asia, de-linked from oil, is inevitable eventually. But that market shift is unlikely to happen in 2017.
In the next few years, the LNG market should start to recover from what is a cyclical, not structural, downturn. Population growth, urbanisation, electrification of transport and the shift to low-carbon fuels all favour gas use. Yet the LNG industry should not be complacent. LNG needs to remain cost competitive in a world of falling renewable-energy costs, avoiding the cost overruns that have plagued it in the recent past. And, as a fossil fuel, developers need to show that gas remains relevant to visions of a low-carbon future.
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