The LNG oversupply situation looks set to be sustained for longer and at a greater magnitude than previously thought likely.
What impact might this have on gas markets and on future investment in the sector?
LNG oversupply larger and longer than before
- The drop in demand in major LNG markets together with demand in China and South America not materialising as expected means that the oversupply picture is now larger and longer than previously projected.
- 2017 is expected to be relatively tight. Just over 10 mtpa of additional LNG supply is expected to come online as projects that came online in 2016 continue to ramp up. LNG demand is expected to increase by a similar amount.
- In 2018, this is expected to change significantly. Close to 50 mtpa of new LNG export capacity is expected to come online from the remaining new projects in Australia, 4 new projects in the US and Russia(40 mtpa in total) in addition to further ramping up from projects recently online (approximately 10 mtpa). However, demand is projected to increase by less than half of this giving an oversupply of over 20 mtpa.
- The LNG oversupply position is projected to increase further post-2018. Close to 40 mtpa of additional supply which is under construction will come online in 2019 and a further 10 mtpa in 2020. This will continue to outstrip demand and lead to an oversupply of around 40 mtpa. If no further planned projects are developed, then this surplus dissipates by 2023.
- However, several projects are close to taking Final Investment Decision (FID) in the next few years and we assume others will do so before 2025 and therefore will come online before 2030.
- QED’s ‘Conservative’ view of additional supply before 2030 sees around 130 mtpa being added (60 mtpa) from the Atlantic Basin (mainly the US) and 70 mtpa from Asia Pacific (including Canada, East Africa and the Middle East.)
- This result in an oversupply remaining at above 30 mtpa out to 2025 and extending to over 40 mtpa out to 2030.
Will Europe absorb the excess LNG supply?
- The oversupply scenario described above, assumes that LNG demand in Europe increases at an average rate of around 5 mtpa per annum returning to previous highs of 66 mtpa by 2020 and up to 80 mtpa by 2025. This is equivalent to approximately 40% and 50% utilisation rates for existing LNG import capacity respectively.
- Given the abundance of LNG import capacity, if we assume utilisation levels of say 60%, Europe can import an additional 30 mtpa in 2020 and 20 mtpa in 2025, and potentially absorb excess LNG supply in this period.
- However, this depends on the competitiveness of LNG which would have to take more market share from existing Russian and Norwegian pipeline gas supply.
- With more than 50% of US export capacity contracted to European or Portfolio players, and with many Asian buyers over contracted looking to resell US capacity, Europe is a key market for existing, under construction and planned US LNG supply, but at a minimum price.
- If we assume US Henry Hub prices of $3/MMBtu, 15% for fuel gas, shipping and regas charges of $1/MMBtu and only a $1/MMBtu contribution to the c.$3/MMBtu sunk liquefaction costs, pipeline gas supply would need to compete at $5.5./MMBtu (40p/th). This approximately to the average NBP price over 2015 and 2016.
- Any established US LNG exporters should be willing to export LNG at these prices in order to make at least some contribution to the sunk liquefaction cost. At prices below $4.5/MMBtu (35p/th) no contribution to liquefaction costs are possible and it would not make economic sense to export LNG to Europe.
LNG is likely to become a competitively priced fuel into the medium and long term. What will this mean for the challenges of developing LNG to power projects in new markets?
Increasing demand from other existing large gas and LNG markets
- Many developing economies with large existing gas markets developed over many years using indigenous supplies have now turned to LNG. With gas supply infrastructure and demand already in place, LNG imports can be implemented more easily with government energy policy and gas pricing as the key issues.
- In the space of around 10 years many countries have gone from no LNG to having multiple LNG import terminals in operation or under development, largely based on FSRUs. Recent examples include Argentina, Colombia, Brazil, Bahrain, Kuwait, UAE, Pakistan, Egypt, Bangladesh, Thailand, Malaysia, Turkey and Indonesia. We predict LNG demand will triple from around 10 mtpa in both the M.East and S.E.Asian regions by 2025.
- LNG demand is also projected to almost double in both India and China by early 2020, but then increase at a much slower rate as indigenous supply increases and pipeline imports commence around 2020 in China and later in India. On the other hand, demand is expected to increase only moderately or even fall slightly in the larger traditional LNG markets of Japan, Korea, Taiwan and North and South America.
Potential new LNG markets
- There are many other countries looking to develop gas markets based on LNG imports, but not without difficulty. The first step is to identify sufficient potential for gas demand, likely to be for power generation, and then decide how to jointly or separately develop supply infrastructure and power plants.
- In countries like South Africa, Ghana, Philippines and Morocco this is a bit easier given some existing gas market and large growth in power demand. In others, such as Senegal, Namibia, Cyprus, Benin, Sri Lanka and Lebanon, projects have been harder to get off the ground due to uncertainty around anchor demand and energy policy. Assuming many of these projects go ahead, this could add another 15-20 mtpa of demand by 2025.
- Countries with existing large gas markets are expected to continue to increase their reliance on LNG. But it is now also an opportune time for more countries with little or no existing gas market to turn to LNG. There is no shortage of LNG supply at competitive prices out to 2030.
- In the US alone, in addition to the 60 mtpa under construction, plus the 60 mtpa with approval, these is close to 160 mtpa of projects which are in planning stage but have not yet received approval. Further supply competition will be provided by Iran, Russia and others.
- With a well-supplied market out to 2030 and possibly beyond, LNG is no longer a niche product but likely to become a globally traded, competitively priced fuel into the medium and long term.
QED provides a comprehensive consultancy service to the international gas and LNG industry specialising in strategy implementation, project realisation and negotiating commercial agreements. To discuss how the above may impact on your project or business (import or export) contact: website: www.qedgas.com phone: +44 (0)20 7936 4385 or email firstname.lastname@example.org