November 15, 2019/OilPrice.com
Spot LNG prices in Asia-Pacific are hovering around the $6/MMBtu level at a time when seasonal winter demand usually pushes them higher. The reason is not hard to see – excess liquefaction capacity coming on-stream in the US, compounding the build-up of capacity in recent years in Australia, as well as additions in Russia and elsewhere.
There is also a year-round seasonal impact. A mild winter generally gives way to weak summer pricing and a certain amount of residual LNG in tank. Buyers can fill up cheaply and enter the next winter season well stocked. Gas storage in Europe was full early this year, owing in large part to the availability of cheap LNG and a relatively weak drawdown over the previous winter.
But it is on the mid-2020s to which LNG developers focus has turned, perceiving a demand gap as South Asian countries in particular ramp up their demand for LNG, adding to still strong annual gains from China.
Yet the demand gap in 2020 appears to have been filled. According to GlobalData, the US will add 156.9 million metric tons per annum of new liquefaction capacity by 2023. Not all of this capacity is certain by any means, but even when only projects which have taken Final Investment Decisions (FIDs) are counted, in the US and beyond, the expected demand gap now looks narrow to non-existent.
Qatar plans an expansion from 77 million tons per annum (mtpa) to 110 mtpa come what may. Four 8 mtpa ‘megatrains’ are planned and expected on-stream at three to six-month intervals from 2024.
No formal FID has been taken, but the amount of contracting activity that has and is taking place around the North Field Expansion project indicates this capacity will emerge. In early October, Qatar Petroleum announced that it had short-listed potential partners for train construction. It has already awarded all the upstream contracts.
In Mozambique, two major projects have taken FID this year in addition to the already under construction smaller Floating LNG Coral project. In total, Mozambique can expect to go from naught to 31.5 mtpa capacity by 2024, although building two large LNG projects – Rovuma and Mozambique LNG – on the same site and at the same time is likely to create logistical challenges.
Russia’s Novatek has given a greenlight to its Arctic LNG 2 project, which will boost Russian LNG capacity by 19.8 mtpa. The company has plans to increase capacity to a total 70 mtpa by 2035, and Arctic LNG 2 will get it halfway there. Exploration successes suggest ample gas resources, and Novatek and LNG, in general, has strong Russian government support. Novatek has already demonstrated its capacity to get foreign partners, particularly Chinese finance, on board.
Then there is Canada. Although glacially slow to free itself from dependence on the US market, the FID taken on Canada LNG last year was a major step forward. The project is expected to give the country export capacity of about 13 mtpa from 2023, but there are a number of other LNG projects close to FID on both the west and east coasts, which could turn Canada into a significant market player by the mid-2020s.
Based on US Energy Information data for plants under construction or for which a formal FID has been taken – a relatively conservative measure – US liquefaction capacity should rise from 55 mtpa currently to 116.5 mtpa by 2024.
In addition to other projects, such as BP and Kosmos’s evolving west African LNG hub, and discounting the potential for existing site expansions, more than 160 mtpa of new LNG capacity can be expected on-stream by 2024.
At no time has LNG demand jumped that much in a five-year period, although the largest leap since the millennium was in 2014-2018 when LNG imports rose 97.34 mtpa.
There is on paper enough regasification capacity to absorb the increase and more being built, but the huge rise in liquefaction capacity presupposes much higher utilization in regions which have not previously demanded so much LNG, such as Europe.
The availability of competitively-priced LNG is itself a major demand stimulus, which will encourage new market entrants. But while in their initial phases LNG coming into, for example, India, Bangladesh and Pakistan, will meet existing gas deficits, the further out demand projections go, the more dependent they are on new infrastructure being built in-country.
All three south Asian countries have poor track records when it comes to the timely completion of major infrastructure projects.
McKinsey forecasts LNG demand growth of 3.6% a year from 2018-2035, arguing that supply additions will create a ‘long’ market until 2025 and possibly 2027. Others, such as Shell, in its LNG Outlook 2019, argue that supply investment is still needed to meet continued LNG demand growth, which it notes has surprised on the upside in recent years.
This optimism is not unwarranted. The potential for coal-to-gas switching in India and China, as well as the growth of new markets for gas such as in transport, are huge. Climate change concerns and local air pollution concerns suggest coal-to-gas switching will be actively pursued. But the critical issue for companies will be the timing.
On the supply side, the LNG industry appears doomed to a cycle of booms and lulls in construction activity as future supply gaps emerge and are over-filled. Demand-side growth expectations depend on longer-term structural changes largely in developing economies. There is ample potential for recurrent mismatches, with the current outlook being for an extended ‘long’ market.