The Fuse

LNG Surplus Disappearing, Supply Gap May Emerge

by Nick Cunningham | March 07, 2018

The LNG surplus that until only recently was thought to persist through the mid-2020s is quickly evaporating amid strong demand growth. Sharp increases in LNG export capacity that came online in the past few years have been met with a surprisingly strong demand from a long list of countries in Asia and elsewhere. The feared glut may not materialize after all.

In fact, the LNG market could see the opposite problem. The significant decline in investment in new LNG export capacity due to the price downturn that began in 2014 could precipitate supply problems in the 2020s, mirroring similar trends in the crude oil market.

LNG glut no more

“The LNG glut—conspicuously absent isn’t it?” Royal Dutch Shell’s CEO, Ben van Beurden, told reporters at a press conference in London on February 1. “The glut has not played out just as we said would be the case. In fact, we see a rather tight LNG market,” he said, appearing satisfied with the current trends. In 2015, Shell spent more than $50 billion to acquire BG Group, and skeptics criticized the hefty price tag.

“The glut has not played out just as we said would be the case. In fact, we see a rather tight LNG market.”

Demand appears to be clearing the additional supplies faster than expected just a few years ago. In 2017, an estimated 30 million tons of annual LNG export capacity (mtpa) came onto the market, a roughly 10 percent increase in total capacity from a year earlier. However, that huge volume “disappeared, welcomed by the market,” Total SA’s head of LNG trading, Patrick Dugas, said in Vienna in January, according to S&P Global Platts. “In 2018, we will see what’s happening with 40 million mt coming into the market.”

China is the principal reason why the LNG market has suddenly tightened. China has embarked upon an ambitious campaign to switch old coal-fired power plants and coal-fired residential furnaces to natural gas in an attempt to reduce urban smog. The effort has made rapid headway, so much so that China has run into acute gas shortages. China’s LNG imports jumped by nearly 50 percent to 38 mtpa in 2017, surpassing South Korea to become the second largest LNG importer in the world after Japan.

India, Pakistan, Indonesia, and other nations in East and Southeast Asia are ordering more LNG cargoes, helping to erase the glut.

However, China is not the only driver of stronger demand. India, Pakistan, Indonesia, and other nations in East and Southeast Asia are ordering more LNG cargoes, helping to erase the glut. “The entire Asian LNG market will increase. It will stimulate more producers to take the risk to develop projects to get into Asia,” Jarand Rystad, chief executive of consultancy Rystad Energy, told Reuters in February. Meanwhile, Southern Europe surprised market forecasters as well in 2017, importing 10 mtpa more than a year earlier, double the growth rate that analysts had expected.

Long-term fundamentals favor gas producers. Royal Dutch Shell estimates that natural gas demand will rise at an annual rate of two percent through 2035, twice as fast as total energy demand. Moreover, LNG demand will grow at a four percent annual rate. Policy support intended to clean up local air pollution (China) and cut greenhouse gas emissions (U.S., Europe) should bolster gas demand.

Glut turns to shortage

In fact, there are suddenly concerns from some in the industry that the dearth of new LNG export projects could create tight conditions in the 2020s, just as the shortfall in conventional crude oil production may lead to a supply shortfall in the next decade. “We’re looking at demand rising year after year, and with those demand numbers and a lack of FIDs on the LNG supply side, there’s going to be a mismatch post-2020,” Amos Hochstein, marketing senior vice president at US LNG developer Tellurian Inc., said at an energy conference in Vienna in late January, according to S&P Global Platts.

That sentiment was echoed by Shell, which warned about pending gas shortages in its second annual LNG Outlook. Final investment decisions have mostly stopped, after a large amount of LNG export capacity was sanctioned between 2011 and 2015. Because of long lead times, some of that capacity is already on the market, but much of it is still under construction. As a result, the lack of FIDs over the last three years will not likely make an impact until the 2020s.

Adding to the complexity, Shell argues, is the rapidly evolving nature of the LNG market. Oversupply has granted leverage to buyers, who are demanding shorter-term contracts with flexible pricing. That is upending a longstanding tradition of long-term contracts with fixed prices and volumes. The glut of supply has created a more liquid market, more spot cargoes, and has weakened the clout of exporters. While this trend benefits buyers (i.e., consumers), it is making it difficult for developers to greenlight new projects. Because of the steep upfront cost and long lead times, LNG suppliers want more certainty instead of relying on the spot market.

With fewer customers willing to sign long-term contracts, LNG developers are hesitant to invest.

“Most suppliers are still seeking long-term LNG sales to secure fi­nancing. But LNG buyers increasingly want shorter, smaller, and more flexible contracts to remain competitive in the downstream power and gas markets in which they operate,” Shell concluded in its report. With fewer customers willing to sign long-term contracts, LNG developers are hesitant to invest. But the lack of investment today will translate into stagnant supply after the current pipeline of LNG export projects come online. New investment will be “required soon to avoid a supply shortage in the 2020s,” Shell warned.

New opportunities

Rising demand for imported gas is opening up new opportunities for export capacity—but it remains to be seen if the pace of FIDs will accelerate.

The surprising increase in demand has boosted prices. The Asian spot prices for LNG—known as the Platts JKM price—recently hit $11/MMBtu, a multi-year high. Tighter market conditions could bring opportunities for LNG export projects that have been sidelined. ExxonMobil is expected to greenlight its LNG export project in Mozambique, which comes after spending $2.8 billion to acquire the 25 percent stake in the project from Eni last year. Anadarko Petroleum is also gearing up for an export facility in Mozambique, which could transform East Africa into a major supplier of gas. In addition, Exxon is looking to expand its existing LNG facilities in Qatar and Papua New Guinea.

Meanwhile, the U.S. just launched its first shipment of LNG from Dominion Energy’s Cove Point facility in Maryland. That makes it the second large LNG export terminal after Cheniere Energy’s Sabine Pass in Louisiana, which began shipments in 2016. Other projects, which began years ago, are under construction, and will help triple U.S. export capacity by 2020. Rising demand for imported gas is opening up new opportunities for export capacity—but it remains to be seen if the pace of FIDs will accelerate.

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