As the global gas business opens, how will Europe absorb the LNG flood?

Europe is the global balancing market for LNG – and that looks likely to continue into the near future as we move into a stage of supply abundance, according to Andrew Walker, VP of Strategy for Cheniere Marketing.

At Flame 2016, Walker spoke about the context of increased LNG supplies worldwide, and the impact of these increased supply volumes on Europe, and the market as a whole.

LNG and the commodity cycle

LNG has been through a ten-year cycle which saw volumes push into Europe in the late 2000s then flow away again, and we’re about to start that cycle again.

The growth in LNG supply since 2010 has been pushing supply volumes into Europe at a steady rate, and those volumes are set to increase dramatically in the near future with increasing supply particularly from Australia and the US.

Walker believes this flexing in supply and demand is to be expected in a long-lead industry, as the LNG market reflects the ebb and flow of rising demand, supply response, over-supply and adjustment seen in a traditional commodity cycle. Abundance in supply has also been facilitated in recent years by factors such as ease of access to capital, enabling projects to find investment more easily.

“Since 2010 we’ve had a growth in supply and Europe emerging as balancing market; Europe took this increasing supply, then the market tightened and we saw a supply hiatus and Europe starting to decant as the market tightened. It looks like we are about to start that cycle again,” said Walker.

The in-flow of cargoes into Europe hasn’t yet started in earnest, says Walker, but it is on its way. “I believe this is a good thing for Europe; LNG will help diversify supply, competition is good, whether it’s competition between LNG and Russia or between LNG, pipe supply and domestic supply. An increasingly competitive marketplace is a good marketplace for gas.”

Flexing global demand

This in-flow in supply to Europe is taking place in parallel to a flexing demand in markets throughout the rest of the world, and a structural change to some markets. New markets – such as Pakistan and Jordan – are emerging, but the recent slowdown in some key Asian markets of Japan, Korea and Taiwan are the cause of some concern.

Since the 2000s and until recently, Japan, Korea and Taiwan – that between them represent 70% of Asian imports - have shown steady demand growth, says Walker. But Japan has now plateaued, Korea has seen a dip in demand in recent years, whilst demand from Taiwan has also stagnated.

Some of this can be explained by environmental, societal and policy impacts in already mature markets, but the challenge for the industry is how to read this going forward, and only time will tell whether this softening in demand is due to structural or cyclical factors. Walker remains optimistic - India and China, as large volume growth regions with a nascent LNG market, are the focus for growth in demand in the region.

Future supply

As with any commodity cycle, the view post 2020 will be markedly different to the next four years, believes Walker. “The current low price environment is making project FIDs (final investment decisions) harder,” he told delegates at Flame 2016 in Amsterdam. “The supply side is starting to slow in response to market signals; we have seen no FIDs this year to date and many are still floating.”

Some projects – including Pacific NW LNG, Coral FLNG, Tangguh T3 amongst others – are still slated for FID this year, but others – Jordan Cove, Douglas Channel, Mozambique LNG amongst them – have already been postponed beyond 2016. As and when these projects go ahead, and to meet estimated demand by 2030 - 45 new LNG trains will be needed to be sanctioned.

Walker’s view is that more FIDs are required to meet future LNG demand. “This is a longer term industry – as we look beyond 2020 and coming supply abundance, we have to look at supply and demand beyond 2020 and a view of what will be the ‘new normal’. I think demand will continue to grow – we have not yet seen ‘peak LNG’.”