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The Great Glut: Why LNG Markets Might Not Balance Before 2025

The Great Glut: Why LNG Markets Might Not Balance Before 2025

The LNG Glut and the Golden Age of Gas, Part 1

‘Where are all the LNG postponements?’ was the puzzled, plaintive warning heard from Oil & Gas experts Wood Mackenzie last September. Besides the new Australian and American terminals preparing to ship out well over 100 Mtpa (Million tones per annum), of LNG, a second wave that size was making its way through the permitting process.

If there weren’t any postponements soon, the consultants warned, ‘. . . the market could see an additional 100 Mtpa of LNG sanctioned in the next six to 18 months, expanding the likelihood of an oversupply of LNG in Asia to 2025.’

It may not have been the first warning about the developing LNG glut, but its tone was the most disturbing, like a fire alarm. So far that year’s only postponement in the U.S. had been BG Group’s Lake Charles terminal in Louisiana.

But I wondered if in asking its question about postponements, Wood Mackenzie wasn’t being overoptimistic again, as all oil and gas experts seem to have been. WoodMac’s question implied that a second wave of over 100 Mtpa would prolong the developing oversupply by several years, but could still lead to a market balance by 2025. Hence they assumed that the global LNG market, which has never traded more than about 240 Mtpa, could absorb new production of over 200 Mtpa in ten years.

Perhaps time will prove them right. I just didn’t think it likely, one reason being that the world’s oil and gas experts had already proved their fallibility. So I started writing this series of articles, in which rather than making firm predictions I explored the probabilities of future market scenarios in light of past and present trends. Those probabilities led me to the following conclusions:

• It seems quite possible that today’s early entrants on the global LNG market, such as Cheniere, will do fairly well, thanks to a solid portfolio of long-term contracts, and despite huge construction debts, low spot prices overseas, and in time the risk of rising domestic gas prices. But prospects are not favorable for more U.S. entries into the global LNG market than those now under construction. Related: Crude Charging Higher Ahead Of Big Week

• The common expectation that the global LNG market can absorb the first 100 Mtpa of new production by 2020 requires a boost in demand too steep to be plausible. It seems more likely that the market won’t balance before 2025, or even later. This is due to the static level of global shipments in recent years, LNG’s continuing cost disadvantage vis-à-vis other fuels, and the poor outlook for vigorous economic growth worldwide.

• At this time the addition to LNG liquefaction capacity of the greenfield projects proposed for the west coast of North America seems highly imprudent, given that prices in Asia have crashed and because of those proposals’ difficulties in obtaining quality long-term liquefaction or sales contracts.

• The worldwide rush to build liquefaction capacity has the characteristics of speculative bubbles and gold rushes of past centuries. In the case of the developing LNG glut, the blame must probably be shared by overambitious promoters and prestigious but imprudent energy experts.

One example of shared responsibility between promoters and experts could be the bar graph below, titled ‘Steady LNG Demand Growth Projected’, which was part of a presentation by Cheniere of July 2015. That was well before Charif Souki’s ouster as CEO in December, and obviously designed to create enthusiasm for Souki’s ambitious plans – which Cheniere’s new board has trimmed since.

According to Cheniere, the source of the graph was WoodMac. It shows actual annual LNG trade from 2000 through 2015 (except that the 2015 shipments were an estimate made in mid-year). Those years are followed by a projected LNG boom that’s supposed to start now, in 2016. I have drawn three red horizontal lines on the graph. The bottom red line marks actual LNG trade in 2015. The other two mark WoodMac’s trade predictions for 2020 and 2025. For clarity, I marked with numbers two recent years that are especially important, 2011 and 2015.

(Click to enlarge)

The bar graph shows that after rising at a fairly steady pace, the global LNG market saw sharp increases in 2010 and in 2011, when it reached 242 Mtpa. The Mtpa totals for the five years 2011 - 2015 are listed below:

Because during those five years, annual LNG trade moved within a narrow range between 237 and 242 Mtpa, I will call them ‘the 5 flat years’. As we shall see, in projections by gas experts those flat years were unforeseen.

While I would welcome contrary facts from people in the LNG business, I was able to find only limited evidence that supply shortages contributed to causing the 5 flat years, except perhaps in 2012:

The 2012 decrease in LNG trade was largely driven by supply?side issues in Southeast Asia (Indonesia and Malaysia) and domestic and political challenges in Egypt, Libya, and Yemen (e.g., the Libyan Marsa el Braga facility has made no deliveries since the 2011 civil war, and is assumed to be decommissioned). Increased production in Qatar and Nigeria partially offset these losses. Related: BP Shareholders Revolt Over CEO’s Salary

That Qatar was capable of making up for some of 2012’s lost capacity seems to be supported by the graph below, which shows that Qatar had added about 25 Mtpa of capacity during the three preceding years. (Qatar is the light blue in the bars below; the chart’s numbers are in m³; 1 m³ = .405 tons.)

(Click to enlarge)

This 2015 graph by the IEA (International Energy Agency) also shows that 2012 saw the smallest addition to LNG export capacity since 2005, the Pluto terminal in Australia, which started operating at only part of its 4.3 Mtpa capacity. But 2013 added twice as much supply and 2014 doubled that again, as did 2015. Even more is expected to hit the market by 2020, mainly from Australia (dark blue) and from the U.S. (green). As an apparently unexpected result, LNG has already become a buyer’s market, with Asian interest in signing long-term contracts greatly reduced. That the effects of 2012’s limited supply did not last long is also demonstrated by the steep slide of Asian spot prices that started in early 2014. In recent months they have slid even lower.

During the 5 flat years the first bar graph showed a steep increase in Asia-Pacific trade (the light blue bottom part), while European trade (dark blue) shrank, making up the difference. It’s widely known that the rising Asia-Pacific trend was mostly driven by a demand boost in Japan, the world’s largest LNG consumer, due to the government-ordered closing for safety inspections of some four dozen nuclear power plants after the 2011 Fukushima meltdown. That calamity boosted imports of coal, oil and LNG to make up the lost generating capacity. It caused spot LNG prices in Japan, already higher than contract prices, to rise steeply, so that 2012 and 2013 saw some European LNG importers diverting or re-exporting contracted cargoes to Japan. Even with high LNG carrier rates they could make money on those trades, and unlike Japan, South Korea and Taiwan, Europe had pipeline gas available, along with cheap coal for its power plants.

While that same bar graph shows actual LNG trade of about 240 Mtpa during all the flat years 2011-2015, it does not show that WoodMac had predicted trade of 250 Mtpa by 2015. As confirmed by the red lines I drew on the nearby line graph, WoodMac had also predicted about 360 Mtpa for 2020, and 440 Mtpa by 2025. In other words, WoodMac considered it reasonable to expect a capacity increase of about 100 Mtpa to be absorbed by the market by 2020, and for that performance to repeat by 2025.

(Click to enlarge)

In 2012 Ernst & Young published even more upbeat projections for the global LNG trade, for which it had combined ‘data from multiple sources’. Those projections are shown in the bar graph below, again with red lines added to clarify them. Notice Ernst & Young’s black lines at the top, identifying as ‘Actual’ the years through 2011, and as ‘Projected’ those starting with 2012. Citing the IEA (International Energy Agency), they said:

(Click to enlarge)

Global LNG demand by 2030 could . . . be almost double that of the estimated 2012 level of about 250 million metric tonnes. Japan, South Korea and Taiwan (collectively, JKT) have been and are expected to remain the backbone of the global LNG market, while China and India are expected to be the biggest sources of additional LNG demand. Related: The Halliburton-Baker Hughes Merger is Falling Apart. What Happens Next?

Like WoodMac’s estimate for 2015, E&Y’s estimated 2012 trade of 250 Mtpa turned out to be wrong. This is not serious by itself, but it was part of a projected growth trend that never materialized, which predicted global LNG trade of about 310 Mtpa by 2015, some 70 Mtpa or 29% more than the actual number. The table below compares the two projections, WoodMac’s and E&Y’s:

These numbers make plain that both consultants predicted that new demand could absorb over 200 Mtpa of new production by 2025, though E&Y’s predictions were more front-loaded than WoodMac’s. All this raises a couple of questions that are important for anyone trying to make predictions beyond 2015.

One question to ask is: what would have happened to the global LNG trade without the Japanese catastrophe? Would it have continued to rise, or would it have stagnated as it did, or declined?

The possible answers are a mixed bag. On the one hand, the passing supply restrictions of 2012 might still have had a temporary effect on growth. On the other, if in the absence of the earthquake Japanese demand had been flat or mildly rising, then shipments to Europe would have had to increase in order for global trade to keep growing at the same pace.

But European demand turned out to be not very robust, due to a combination of factors including mild winters, imported pipeline gas from Russia, and a lot of cheap coal used instead of gas for power generation. And finally, for its projected global growth E&Y in particular counted on robust demand growth in ‘other Asia’, the light grey part of the annual bars in its graph. ‘Other Asia’ would be mostly China and India. But as we shall see, such high hopes among LNG exporters may be disappointed.

The other question we should ask is why, in view of the 5 flat years, we should believe that the present year, 2016, will see the start of another growth spurt in LNG shipments, and a steep one at that, to make up for the recent pause; for this is clearly what the first bar graph, from Cheniere/WoodMac, showed.

It seems counterintuitive, like shifting a manual transmission directly into third gear while standing still. I do realize that can be done while your car is parked on a steep hill facing down, but that’s a unique situation. In this case the current low LNG prices may give a hill-effect, stimulating demand, but as we will see there are other market conditions that may work against that, too.

More about what we should believe in part 2.

1. ‘WoodMac: Where are all the LNG postponements?’ WorldOil, 4 September 2015; ‘WoodMac: LNG projects pushed head despite oversupply’, LNG World News, September 3, 2015.
2. For simplicity I use the term Mtpa throughout these articles, even though one year’s shipments are usually stated as millions of tons, without the ‘per annum’ part. For reasons I don’t know, past annual LNG totals can vary slightly from one source to another. I should also mention that I have misgivings about the term ‘demand’, as used in the WoodMac bar graph. ‘Demand’ isn’t necessarily identical to trade volume, which is what the graph really shows and/or projects.
3.‘Global Natural Gas Markets Overview:’ by Leidos, Inc., under contract to EIA, August 2014, page 9.
4.‘Global LNG: New pricing ahead? - LNG demand growth’ EY – Building a better working world. The article is undated but its context suggests 2012 because 2011 is the last year listed as ‘actual’ in the graph. http://www.ey.com/GL/en/Industries/Oil---Gas/Global-LNG--New-pricing-ahead---LNG-demand-growth

By Wim de Vriend for Oilprice.com

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  • JHM on April 12 2016 said:
    Wind and solar are cheaper than LNG. There is no growth opportunity. There is no profitable price for LNG.

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