A buyer’s LNG market
Demand may be set to surge, but Asia’s largest gas importers remain firmly in control
Asia's liquefied natural gas suppliers are becoming increasingly willing to provide more flexible terms to buyers to maintain a foothold in a market in which supply will outstrip demand until at least the middle of the next decade.
Global LNG demand is forecast to rise by more than 30%, to 353.43m tonnes a year between 2016 and 2020, according to Wood Mackenzie, a consultancy. Meanwhile, demand in the Asia-Pacific region alone is forecast to rise by 27% in the same period, reaching 243.25m t/y. This represents almost half of total global demand growth. Energy-hungry markets in China, India and Pakistan will drive the increases.
But global LNG liquefaction capacity is likely to grow even faster than demand—by a third between 2016 and 2020, reaching 452m t/y. Australia's capacity alone is expected to more than double by 2020, reaching 93m t/y, compared to 2015 levels.
The strategy of Australian LNG export project developers looked relatively sound when plants, which are now being brought online, were conceived. In 2011, Japan, the world's largest LNG importer, urgently sought more LNG supply to compensate for the shutdown of its nuclear plants following the Fukushima disaster. But six years later, as the country's nuclear plants are coming back on line, the situation is looking very different.
Meanwhile, sluggish economic performance in South Korea, another major LNG-import market, has curbed demand growth there too.
All eyes on Asia
Qatar, at one time more focused on supplying European markets, is making a push for market share in Asia, often undercutting rival suppliers. But the tiny Middle Eastern nation, with LNG export capacity of 77m t/y, has also recently started looking for fresh resources from the giant gas field it shares with Iran, raising the possibility that it could seek to send even more LNG towards Asia. Malaysia, the world's third-largest exporter, with around 25m t/y of capacity, is also boosting output. Fresh supply from just across the Indian Ocean in East Africa is on the way too, as LNG export projects in Mozambique and Tanzania progress. Chinese and Indian companies are again among the investors there.
The likely outcome of the supply glut will be downward pressure on LNG prices. Energy Aspects, a consultancy, sees average annual prices falling to around $4 per million British thermal units (Btu) in 2018 from $5.5/m Btu in 2016 for both Japanese and Indian LNG imports.
The world's largest LNG buyers—all Asian companies—are now capitalising on the glut, by attempting to wrest control of the market away from suppliers. In March, China's Cnooc, Japan's Jera and Korea's Kogas signed a memorandum of understanding to exchange information and cooperate in the joint procurement of LNG. These three will have significant clout as, between them, they buy around a third of global LNG production.
The uncertain economics mean no further large-scale LNG plants are likely to be sanctioned in Australia for the foreseeable future, while much US supply could also be absorbed by the fast-growing European LNG market, as large swathes of that continent seek alternatives to the Russian pipeline gas supply on which they are heavily dependent. However, few market observers believe the LNG supply-demand imbalance will be eliminated much before the early-2020s at best.
In the longer-term, the Asia-Pacific region could still see a 50% increase in LNG demand between 2016 and 2035, with some consultancies forecasting demand from Southeast Asia could soar by 80%, while south Asian demand could rise by 70%. These increases will be driven by increasing power sector needs in Bangladesh, the Philippines, Vietnam and Indonesia-as well as Malaysia, Pakistan, Thailand, Singapore, India and China.
But what happens to the Asian LNG market beyond the next five years or so may well depend on how quickly renewable energy is adopted, the advances made in energy storage, and whether gas becomes the bridging fuel to a renewables-powered future-at the expense of coal-that the gas industry hopes it will.
This article appeared in the AOGC daily newsletter, produced by Petroleum Economist for attendees of the 19th Asia Oil and Gas Conference held in Kuala Lumpar.