Strong demand for LNG, particularly in Asia, has fueled renewed interest in new LNG export projects. Rising imports from China, in particular, are helping to reduce the rather large surplus of supply. LNG prices are rising again, marking an end to a several-year downturn in the market. The glut had been expected to grow through the end of the decade and into the 2020s, but now, it may not materialize at all.
LNG market tightens suddenly
Just as the oil market suffered a period of oversupply and a downturn in prices, the enormous increase in LNG export capacity across the globe contributed to a weaker market in recent years. To be sure, some of the downturn was the direct result of the drop in crude oil prices—LNG contracts have traditionally been linked to crude prices. But a long list of LNG projects that have come online in the past two or three years was supposed to keep prices suppressed into the early-2020s at least.
A long list of LNG projects that have come online in the past two or three years was supposed to keep prices suppressed into the early-2020s.
Besides demand rising so quickly, supply tightness for coal and crude oil is also supporting LNG. “In fact, the world’s fuel tank is looking half empty: Chinese coal inventories are at a 12-year low, and OECD oil inventories have fallen to four year lows. Twin deﬁcits in its competing fuels have supported global gas prices in absolute terms,” Goldman Sachs said in a May 15 research note. Natural gas inventories have also declined, with OECD stocks falling to roughly 650 billion cubic feet below average. Spot natural gas prices are up 51 percent year-on-year in Europe, and some 46 percent higher in East Asia.
China’s demand for LNG has increased sharply since it took roughly 300 million tons of annual coal mining capacity offline in the past few years.
The abrupt end of the pricing downturn is the result of multiple factors—cold winters, maintenance, and supply outages—but much of the surprise shift can be attributed to China. China’s demand for LNG has increased sharply since it took roughly 300 million tons of annual coal mining capacity offline in the past few years, equivalent to 13.3 billion cubic feet per day (Bcf/d) of gas supply, according to Goldman Sachs. The campaign to curtail bad air quality problems largely centers on a massive coal-to-gas switch for electricity generation and for home heating. The effort has arguably been too successful, sparking domestic gas shortages this past winter. This crackdown on coal is stimulating LNG imports, which rose to 38 million tonnes per annum (mtpa) in 2017, a 50 percent increase from the year before. Imports are set to continue to rise at a rapid clip, with China’s first quarter LNG purchases up 59 percent from the same period in 2017. A number of other countries have also purchased more LNG cargoes than expected.
Surging demand is reflected in the recent increase in prices. Spot JKM prices for East Asia averaged $8.98/MMBtu between January and May, according to S&P Global Platts, up $2.27/MMBtu from the same period in 2017.
New LNG capacity to move forward
Fears of a glut led to a dramatic slowdown in new export capacity over the past few years. Now, however, there is a growing number of analysts predicting the opposite problem. “I don’t believe we’re in a glut market right now,” Amos Hochstein, marketing senior vice president at US LNG developer Tellurian Inc., said at an industry conference earlier this year, according to S&P Global Platts. “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.” Goldman Sachs echoed that sentiment, writing in a note that “natural gas is gaining market share relative to other fossil fuels, but new sources of supply must be developed to sustain this trend post 2020.”
Fears of a glut led to a dramatic slowdown in new export capacity over the past few years.
By 2025, global LNG demand could outstrip supply by as much as 50 mtpa, according to Wood Mackenzie, equivalent to about 20 percent of the entire volume of LNG traded in 2016. That is a sharp turnaround from the surplus predicted by many analysts up until recently for the early- to mid-2020s.
The newfound tightness in the LNG market is reviving interest in new export facilities. On May 22, Cheniere Energy announced a final investment decision for a third train at its Corpus Christi LNG export facility, the first FID on new liquefaction capacity in the U.S. since 2015. Additionally, Anadarko Petroleum is looking to raise $14-$15 billion from banks and export credit agencies to build a massive LNG export facility in Mozambique.
The disappearance of the supply glut and the increase in LNG prices have opened possibilities for new projects to move forward, but the challenge for the market is that developers typically greenlight export facilities only after signing long-term contracts with fixed pricing arrangements with buyers.
That way of conducting business in the LNG market is in the midst of significant change. The enormous additions in LNG export capacity over the last few years have increased trading volumes, boosted market liquidity, and created a viable spot market. Because a utility in Japan, for instance, can shop around and secure LNG cargoes at reasonable prices on relatively short notice—which might have been difficult up until a few years ago—the company has incentive to shy away from signing a contract committing to buying fixed volumes for years to come. In other words, the market is relying less and less on the use of long-term contracts.
The enormous additions in LNG export capacity over the last few years have increased trading volumes, boosted market liquidity, and created a viable spot market.
A more nuanced shift in the market is likely, as new capacity comes online with more flexible conditions compared to years past. LNG exporters also have to assume more risk. For instance, Cheniere Energy gave the greenlight on the third train at its Corpus Christi facility even as it only secured commitments for about two-thirds of the capacity as of early May. Goldman Sachs noted that “this represents a higher level of risk than most projects previously sanctioned in the U.S. and Australia, where long term contracts covered at least 80 percent of liquefaction capacity.”
U.S. LNG to Asia
An estimated 52 U.S. LNG cargoes went to Asia between January and April of this year.
The inauguration of new LNG cargoes in 2016 from the United States was widely cited as a watershed moment for European energy security. U.S. LNG was expected to supplant Russian gas supply. But, so far, most U.S. LNG has gone elsewhere. In 2018, only three U.S. LNG cargoes have been shipped to Europe, even as the continent saw gas storage levels dip to record low levels during the winter. Instead, an estimated 52 U.S. LNG cargoes went to Asia between January and April, according to S&P Global Platts.
It is simply more profitable to ship to the higher-priced Asian market despite longer distances. The center of gravity for the LNG market going forward will continue to be Asia, with China looming large over any forecast.