The Fuse

LNG Supply Tightness in 2020s, But Glut Today

by Nick Cunningham | April 03, 2019

A wave of new LNG export capacity is hitting the market this year, sending prices tumbling amid a burgeoning supply glut. Projects planned years ago are reaching completion, expanding the volume of gas traded globally.

The sudden addition of new export capacity has complicated a raft of other projects hoping to move forward. While the world will likely soak up new cargoes over time, tightening up the market, project developers face questions on the next tranche of export projects.

2019’s wave of supply
When global natural gas and LNG prices spiked in the aftermath of the 2011 Fukushima nuclear meltdown, it opened up an enormous opportunity for new gas export projects. Multiple terminals received the green light around the world – and in the U.S. and Australia in particular – on top of terminals already in the works. It generally takes several years and billions of dollars’ worth of development, but the results of those investments made a half-decade ago are now being realized.

Spot prices for LNG in Asia – the closely watched Japan-Korea Marker (JKM) – fell to $4.375 per million Btu on March 26, according to Bloomberg. That is down by half since the start of 2019, and is down more than three-quarters from the peak reached several years ago.

“We expect global LNG supply to reach 380 mtpa by the end of 2020, which is over 50% higher than 2015 levels,”

“We expect global LNG supply to reach 380 mtpa by the end of 2020, which is over 50% higher than 2015 levels,” Bank of America Merrill Lynch wrote in a note on March 20. Over the last two years, global LNG supply surged by 50 mtpa, the bank said. That has overwhelmed demand, leading to the recent crash in prices. “LNG supply growth of 22 mtpa in 2018 proved too much to handle. Now, we expect another 46 mtpa supply in 2019 and 27 mtpa in 2020, with most of the volumes coming from the US,” BofAML noted.

Citigroup agreed, writing in a note: “Prices could keep falling and stay low for weeks, perhaps until sometime closer to the middle of the year, after the market has adjusted and overcome frictions on the supply, demand and shipping sides.”

Notably, prices in Europe are falling to the point where shipping LNG from the U.S. may not be profitable. And because JKM prices in Asia are just as low, some supply might need to be curtailed. Bloomberg New Energy Finance says that some gas exporters are using the period of weakness to shut down their facilities and conduct maintenance. In March, Cheniere Energy announced a round of maintenance at two of its LNG trains at its Sabine Pass facility, for instance. Bank of America Merrill Lynch also said that some cargoes were likely sitting in Asian waters, essentially acting as floating storage for a period of time.

LNG market expands, tightens up
However, the outlook over the medium-term is completely different. Some analysts see a supply deficit looming because of the dearth of investment in the next wave of export projects. Recently, the rate of investment has begun to pick up again, as companies are eyeing tight supply conditions in the 2020s, even in the face of today’s uncertainty. Shell gave the green light to a massive $31 billion LNG export project in Canada late last year. Notably, that project was shelved earlier this decade during the last downturn. ExxonMobil and Qatar Petroleum announced a final investment decision on the Golden Pass LNG project in February, a $10 billion project on the U.S. Gulf Coast.

There are benefits for companies moving forward during a downturn. “From a cost standpoint, the timing is prudent,” Alex Munton, a principal analyst at Wood Mackenzie, said in a statement after the Golden Pass FID was announced. “Proceeding with construction now will enable the project to lock in costs and minimise exposure to inflationary pressures before the next cycle of global LNG investment heats up. By moving ahead now, the partners ensure that Golden Pass will be at the forefront of the second wave of US LNG.” Munton went on to add: “To delay FID any longer would simply create the space for other US LNG projects to be developed.”

The expansion of trading volumes also means that the market for LNG continues to mature. Up until only recently, it was routine for LNG deals to be made on a bilateral basis, for a specific period of time at a fixed price that was linked to Brent crude oil prices. That practice has eroded over the last few years as more supply has come online, expanding the spot trade as well as introducing looser terms and pricing practices. For example, LNG exporter Teullurian just signed a deal with Total SA for cargoes from its Driftwood LNG project in Louisiana, with the prices to be based on the JKM marker rather than Brent. “I believe LNG is moving (toward) a gas index,” Total’s CEO Patrick Pouyanne said, according to Reuters. “Gas linked to oil is old world and we have seen in the past two years the JKM-linked market is growing,” he added.

The growth of the LNG trade, proponents argue, should soak up today’s surplus, and by the mid-2020s, a deficit could open up.

The growth of the LNG trade, proponents argue, should soak up today’s surplus, and by the mid-2020s, a deficit could open up. Qatar Petroleum’s CEO said at the LNG2019 conference in Shanghai this week that global demand for LNG will rise by 2 percent per year well into the 2030s. “China, along with India, will continue to lead Asia as the main drivers behind the growth of global LNG demand,” Saad Al-Kaabi said at the conference.

If the forecasts for strong demand turn out to be true, they will hinge on China. In fact, China accounted for 70 percent of global LNG demand growth last year, according to Bank of America Merrill Lynch. “We expect this trend to continue over the next 2 years,” BofAML said, referring to China’s pivotal role. Nevertheless, in the short run, the market will suffer from oversupply, BofAML noted. China’s additional demand “will fall well short of global supply growth” this year and next.