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Global LNG Markets: the Outlook from Flame

Posted by on 21 May 2018
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The Wave to Come

“We are in a very similar position as an industry, going through the same narrative,” Cheniere’s Andrew Walker told attendees during his presentation at the 2018 Flame conference. “Looking out for the wave to come, waiting for the wave to hit Europe – and then figuring out retrospectively why it didn’t arrive.”

The long expected oversupply of the global LNG market has indeed yet to materialise. Increasing supply has been offset by an equivalent increase in demand from the Chinese market, driven by a need to reduce air pollution from power generation and small scale industry, and aided by the growing appetites of the nation’s petrochemical industry. Rising demand from other regions, including JKT (which grew by 5 million tonnes in aggregate last year, defying predictions of a slump) and Pakistan has also played a part.

Nevertheless, unexpectedly high demand represents a deferment rather than a nullification of the anticipated oversupply. “2019 – 21 is the period where the consensus view is that we’re going to have some excess LNG that is looking for a home,” Nazim Osmancik of Centrica summarised. “And then very quickly afterwards we’re seeing a market which will rebalance, and then go into a deficit.” Osmancik’s view is that the coming glut will likely be a shallow one – as little as one extra degree of cold in Europe and Asia could easily soak up the additional volumes.

Supply & Demand

How much excess LNG saturates the market will be influenced by two factors. The first will be the level of success achieved by several new LNG projects coming onstream in the coming years. These include the second, third and fourth trains at Novatek’s Yamal LNG facility, with the second expected to begin operation towards the end of this year. Yamal will be followed by a new project, Arctic LNG-2. This project will include three trains, each with a capacity of 6.6 million tonnes per-annum, and is slated to begin production in 2022-23.

The other factor is how quickly demand can be generated. There is a growing sense that Europe will become a more attractive destination for LNG cargoes as European hub prices and Asian spot prices converge. Although overall demand for natural gas in Europe is expected to remain fairly stable, declining domestic production and fears about Gazprom’s dominant market share (which rose to 34% in 2016, according to Danila Bochkarev of the EastWest Institute) will likely increase the proportion of European imports provided by LNG. The continent’s extensive and underutilised regasification infrastructure gives it the flexibility to ramp up LNG imports at short notice if necessary – or to stimulate virtual competition to secure cheaper pipeline imports.

Outside of Europe, infrastructure provides a greater obstacle to market growth. “FSRUs don’t solve the problem of a lack of pipelines for final consumption,” Centrica’s Arturo Gallego Diaz told attendees. In emerging markets such as Bangladesh and Pakistan, the development of such internal infrastructure will be key to sustaining demand growth. In China, too, distribution network bottlenecks and an East-to-West oriented pipeline system will place limits on the extent to which winter demand from the country’s less accessible Northern regions can be satisfied by LNG imports. Frank Konertz of S&P Global Platts told the conference that there is also a degree of uncertainty about the seasonality of Chinese demand in the long term, as the overall rise in demand masks intra-annual variations.

Liquidity & Contracting

Anticipated oversupply has been a recurring theme of the discourse around the LNG markets in recent years. Another recurring theme has been the shift towards greater market liquidity, and the impact this will have on LNG supply contracts. In Andrew Walker’s opinion, confidence in the future longevity of US LNG output has been central to providing buyers with the assurance to do without long term supply agreements. The Permian Basin alone contains more than 50 years of gas extractable at break-even prices, and according to the EIA, the costs of recovery will continue to fall (drilling costs by 1% and a year, and operational and equipment costs by 0.5% a year). Walker’s assessment is that the US is home to a “large scale resource with latent supply. The buyers are more comfortable that we might be in a much more buyers/sellers market in terms of future availability, which is making the industry more flexible as we saw, and more liquid as we move through to 2020.”

There is some disagreement about what the future holds for LNG supply contracts. For Walker, the most likely outcome is a “rebalancing from predominantly long term portfolios to a mix of long term, medium term and short term” supply contracts. On the other hand, Charif Souki, the former CEO of Cheniere and the current Chairman of Tellurian, sees things very differently. “I’m perfectly happy to take the model that we created a few years ago at Cheniere and apply it again” Souki told attendees. “But I just don’t think it’s going to work in future.”

For Souki, the variety of different options already available to buyers is creating a far more liquid market for LNG. “Twenty cargoes will be available every day of the year” for buyers to pick from, he told attendees. In the long run, the result will be the “transition to a true commodity market where you don’t need long term contracts,” just as “you don’t have long term contracts for gold, for oil or for any other commodity.”

But if the US is to gain and maintain pole position in this new commodity market, Souki believes there is much work to be done. For associated gas to change from an “expensive problem” caused by shale oil production to a genuine asset, Souki estimates that the country will need to add approximately 100 million tonnes per-annum of new liquefaction capacity onto the 69.6 mtpa it already possesses. If Tellurian and other US LNG players can achieve this, the supply gap predicted by Osmancik and others may prove shallower than the coming glut.

Hear the latest updates on the global LNG market this October 29th - 31st at LNGgc, the UK's leading event for producers, shippers and buyers of liquefied natural gas.

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