10 Challenges Facing LNG
1. In the short term: coping with supply and demand imbalance
Global trade in LNG rose by 4.7 MT to reach 244.8MT in 2015 and supplies will rise over the next 4 years as the 140 MTPA of liquefaction capacity is currently under construction,last year’s start-ups in Australia and Indonesia and 620 MTPA of US capacity reach the market.Simultaneously, demand growth is slowing caused by economic weakness in China, recession in Brazil and increasing financial difficulties in emerging countries.Japan and South Korea, the world’s largest consumers of LNG, reduced their imports by 7 MT in 2015.Japanese demand is uncertain,depending on rate of nuclear restarts,energy efficiency measures and use of solar power, whilst South Korea expects 7-8 GW of new coal generation this year. The question facing the industry is “will demand in North East Asian recover?
2. Low LNG prices
The decline in oil prices and increased weakness in demand growth led to a fall in LNG prices from an average $15.60/MMBtu in 2014 to $9.77/MMBtu in 2015. Low prices cause buyers to wait and see hoping for even lower prices before signing long term contracts,a gambit that threatens developer’s FID decisions for new large scale LNG projects whilst current suppliers face lower revenues for their noncontracted supplies.
3. Europe: The market of last resort
Europe’s role as a key backstop for excess cargoes of LNG is likely to increase as other consumers are unable to absorb new supplies and the policy requirement for energy security will probably envisage increased LNG imports for eastern and southern Europe. However, LNG suppliers face competition from Gazprom, Europe’s main gas pipeline supplier.
4. The challenge of regional trade
Whilst LNG is traditionally seen as a global trade, small-scale regional trades are emerging. For example, Alaskan LNG is destined for the Hawaiian Islands and there are plans for regional LNG and bunkering hubs to be based in Jamaica, Trinidad and Puerto Rica to serve both the Caribbean and Latin American markets. Making small-scale trades profitable could prove challenging.
5. Competition from fossil and renewable energy
In many parts of the world the cost of LNG is uncompetitive with coal. China and India are big consumers of coal and this will not change anytime soon. Elsewhere, renewables are attracting substantial investment and may limit LNG market opportunities.
6. Money matters
For many of the newly proposed non-OECD LNG liquefaction projects,raising capital and securing long term buyers is the major challenge.Project developers need buyers’contracts for most of their output in order to reach a final investment decision.
7. Controlling construction costs
An era of low LNG prices necessitates industry-wide cost reduction and efficiencies. One project, the Magnolia LNG Lake Charles, Louisiana, LNG export development has reduced costs from an average of $800-900 to just $500per metric tonne of LNG production. Developers elsewhere need to follow suit.
8. Educating customers
Perhaps the greatest market challenge arises from overcoming the knowledge and expectations gap between experienced project developers and government customers. Educating governments to enable them to make optimal and timely decisions and create a business friendly financial,regulatory and legal environment is a struggle.
9. Contract issues
Differences or mismatches along a project’s value chain can bedevil projects. For instance, differing cost recovery systems complicate the allocation of costs to infrastructure, the LNG liquefaction or regasification plant and any separate pipeline project. Moreover, the extent to which downstream infrastructure costs can be recovered through upstream production is often an issue alongside differing timelines for licensing, relinquishment and investment have to be worked through. These are just a few examples of the many issues in contract design.
10. In the long term: climate change and the effect of the COP21 Paris Agreement
If, when, and by how much,countries actually implement the commitments they made in Paris to reduce dependence on fossil fuels creates long term market uncertainty for an industry which, is itself thinking 30 years ahead.