LNG May Suffer Boom-Bust Cycle

A flurry of construction around the world will greatly expand liquefaction capacity for shipping natural gas. Companies are hoping to move low-cost natural gas in places like the United States and Australia and sell it to high-priced markets like East Asia. However, the rapid build out of export capacity may suffer from a classic boom-bust cycle, according to Rice University’s Kenneth Medlock III.

He argues that the Fukushima meltdown created a significant, but temporary, shortage in supply. This opened up a wide gulf between natural gas prices in Asia and other regions in the world. LNG exporters are now planning billions of dollars in newly constructed or retrofitted terminals to take advantage of that disparity. Plans are underway in Australia, the United States, Malaysia, Mozambique, and Qatar.

But the price window may begin to close as capacity comes online and Japan restarts some nuclear reactors. Meanwhile, many projects are rushing to compete for what may actually not be that big of an economic pie. “Capital flows to where it sees opportunity and everybody’s trying to grab that flag first,” Medlock, said in a March 3 interview, according to Bloomberg News. “What happens is that you see too many people trying to grab the flag.” This may result in a bust in a few years when lots of capacity comes online at the same time.

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However, John Watson, the Chief Executive at Chevron, disagrees. He argues that billion dollar projects will not move forward if they don’t have the customers ahead of time. “Even companies the size of Chevron don’t build LNG plants without having contracts in hand,” Watson said.

There are many factors that go into determining the profitability of exporting LNG, but a lot will ride on the ability of the U.S. natural gas industry to keep prices low, as well as how big the appetite will be for LNG in Japan, South Korea, and China over the next decade.

By Joao Peixe of Oilprice.com