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NGC prepares for brighter future for LNG

The LNG market faces challenges due to excess supply and the impact of Covid-19, but Trinidad’s state gas company has a strategy for the long term.

LNG prices have seen further declines in 2020, with the existing supply abundance exacerbated by the effects of Covid-19 on global economic growth and energy consumption. As a result, Trinidad and Tobago LNG Limited (TTLNG), the marketing arm of Trinidadian state-owned National Gas Company (NGC), has had to modify its strategy to ensure positive margins during this challenging time.

The pandemic has played havoc with economic expansion in all countries. Global growth, originally estimated to increase in 2020, is now expected to decline in absolute terms by 3pc, according to the IMF. International gas prices are expected to decline to lower levels than previously forecast due to reduced demand to absorb healthy supply.  

The 2019-20 winter in the northern hemisphere has again been atypically warm, meaning the extent of increased LNG demand for heating has disappointed. LNG requirements then plummeted at the end of March and April because of the pandemic-driven impact on industrial demand and various restrictions and lockdowns across Asia-Pacific and the EU. Certain vendors sold cargoes on the cheap to get them off their hands. This contributed to sharply lower LNG prices in April 2020—even to the point at which sales were concluded beneath production costs—and this situation is expected to persist for several months.

The LNG market in the short to medium term will continue to pose profitability challenges, but it remains an attractive and viable clean energy market

For the last few years, the EU market has absorbed any excess supply not required in Asia-Pacific as new production capacity, particularly in the Gulf of Mexico, has come onstream. As a result, any diminution in EU demand has the potential to have a disproportionate impact on global prices.

As with other buyers, European LNG importers have been affected by the coronavirus. The brunt of the impact on LNG demand is expected to be felt in the second quarter of 2020. As of May, there is no timetable for the resumption of normal life and full economic activity across Europe, or at individual LNG import terminals—indefinitely postponing a recovery in EU demand for gas, including LNG. And the ready availability of LNG and pipeline gas at low levels has also led to the build-up of record storage inventory levels in certain countries, which will temper any demand and price recovery later in 2020.

Supply

Global LNG trade reached 354.73mn t in 2019, according to the International Gas Union. This represents an increase year-on-year of 40.93mn t, or 13pc, and marks the sixth straight year of growth. And liquefaction capacity had grown to an estimated 430.5mn t/yr as of the end of 2019—the mismatch reflects a few factors, including maintenance and some shuttered capacity, but mainly reflects the huge swathe of capacity that is getting up to plateau level.

So the increase in supply will continue into 2020 and beyond, even before new capacity of some 15.25mn t/yr in 2020, a further 8.3mn t/yr in 2021 and 3.4mn t/yr in 2022 also comes onstream. On the other hand, the pandemic will have a salutary effect on new LNG liquefaction projects that have not reached FID, which means planned developments scheduled for after 2021 are much less certain to arrive on schedule. Projects may well be deferred to a more favourable time.

354.7mn t – Global LNG trade in 2019

The lockdown-driven slump in global demand and price is not expected to affect long-term trends in pricing structure, but there will be a short-term effect—magnified by the fact that the build-up of LNG export capacity during the last few years of the 2010s was expected to result in a very robustly supplied 2020-24 period even before the pandemic caused demand to plummet.

On the brighter side, medium-term prices are expected to recover substantially for the lows of 2020—even with any lingering effects from coronavirus—although they are not expected to return to the bull market levels of previous years.

NGC's place

NGC's entry into commodity trading over the last decade is an integral part of the company's growth strategy. In recent years, this strategy has been altered to maximise securing revenues from current business and to expand NGC’s investment portfolio to generate income from alternative sources. For example, NGC's commodities trading desk deals in commodities other than LNG.

TTLNG sold its first LNG cargo directly to the global market in 2012 and has continued marketing its own equity cargoes through spot and short-term sales globally via open tenders. In 2019, a memorandum of understanding was signed between NGC and Beijing Rheingau Investment, a subsidiary of China Investment Corporation, one of NGC's partners in Atlantic LNG Train 1, potentially facilitating access to the Chinese LNG market. NGC now markets its own equity offtake from Atlantic Train 1 and Atlantic Train 4 as well as other third party trades.

NGC’s marketing of its share of offtake has eliminated intermediary costs and substantially improved profit margins on the company’s LNG trading compared with using third-party sellers. However, the current market reality for LNG is low prices and reduced margins, and this is expected to persist into the medium term. As a result, NGC has once again had to pivot and adjust its LNG marketing while ensuring its overall strategy for LNG remains aligned to its corporate objectives.

Part of that strategy involves additional focus on the Caribbean, given the competitive advantage provided by its proximity. As part of a broader plan for boosting regional LNG trading, NGC is working with parties involved in the supply of LNG to Jamaica. Recent sales by NGC in the Caribbean attest to the success of these efforts.

NGC also continues to investigate the feasibility of small-scale LNG and micro-LNG projects. This includes the possibility of modifying the Atlantic LNG facilities to accept smaller LNG ships that can serve Caribbean import terminals.

This does not mean NGC has abandoned its extra-regional ambitions. NGC will continue to seek opportunities in areas of growing global demand such as China and India, in addition to collaborating with strategic partners to ensure the growth of its portfolio in nascent markets.

Opportunities ahead

The LNG market in the short to medium-term will continue to pose profitability challenges, but it remains an attractive and viable clean energy market. While the buildout of LNG capacity in the late 2010s has largely been completed, the knock-on effects of the increase of capacity in an environment where patterns of global gas use may change are expected to continue to be felt in years to come. 

430mn t/yr – Global liquefaction capacity

Closer to home, the restructuring of Caribbean economies for the resilience that will be required post Covid-19 provides a unique opportunity to shift fuel requirements for power and transport to cleaner alternatives such as LNG and greener options such as renewables.

The benefits of more flexible contract terms and the ability to import small quantities of LNG are already part of that conversation for larger Caribbean economies, and the expected growth of micro-LNG means the fuel may also be an option for smaller Caribbean states. NGC remains committed to working with its allies and partners in finding viable commercial solutions for providing energy to these markets, in line with broader national and regional goals.

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