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China Makes A Move On OPEC's No.2

China has refocused its attention…

Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Uncertainty Continues For LNG Markets

‘King Coal’ dominated the energy mix during the industrial revolution of the 19th century. The replacement of the steam engine by the internal combustion engine made oil the most important source of energy. However, industrialisation's fallout effect, global warming, has increased the importance of environmentalism. Natural gas is one of the few sources of energy which is relatively clean and able to supplement renewables.

The high energy density of gas and low CO2 emissions compared to oil and coal, have significantly increased the demand for LNG. Decreasing costs and favourable government policies have improved the competitiveness of gas and increased its share in the energy mix of most industrialized countries. This year could be another critical moment for LNG producers due to a large number of projects that are awaiting a final investment decision (FID). Adverse price developments, however, could delay the moment.

Uncertainty ahead

Until recently, the world was facing an LNG oversupply that would have taken many years to absorb. The Chinese government’s decision to make a dramatic shift away from polluting coal, the so-called coal-to-gas policy, significantly increased import and solved the supply glut problem. Some analysts, however, predict that the global demand for LNG will not be able to keep up with consumption in 2019.

On the other hand, European countries are facing an energy security threat due to their overdependence on Russia energy. Therefore, diversification and flexibility are high on the agenda. Russian piped gas, however, is much cheaper than LNG which strengthens energy giant Gazprom's case for two new controversial pipelines: Nord Stream 2 and Turk Stream. Europe is less dependent on LNG due to the extensive energy infrastructure connecting it with producers in North Africa, Norway, and Russia meaning that usually prices are higher in Asia where most LNG cargoes end up. The mild winter in Asia, however, has kept rates low and Europe’s competitiveness, and thus its ability to absorb large volumes, strong. Related: Big Oil Is On A Startup Buying Spree

According to some analysts, the potential downturn of the global economy is another risk for LNG demand. The question is not if something will happen, but when and how severe. China’s GDP growth for 2018 was 6.6 percent, the slowest pace in 28 years. The U.S., in 2018, was the bright spot of the global economy. Most analysts, however, predict cooling of the economy when the effect of Trump's tax cuts wanes. LNG prices would be negatively affected if the global economy continues to cool.

Lastly, China is the wildcard for global LNG producers because the Asian country will be the most significant contributor on the demand side. Two developments will determine whether the Asian giant will dominate the industry for the coming years: pipeline politics and the further implementation of its coal-to-gas policy. At the end of 2019, the Power of Siberia pipeline will be commissioned which will transport 38 bcm of natural gas to China from Russia. Also, the pace of switching household from coal to gas will have a significant effect on prices as most of the energy needs to be imported.

Expected good news

Despite the above-described developments, global producers of LNG are optimistic about the future. This year a record number of projects will reach their FID moment. Approximately 60 million metric tonnes per annum (mmtpa) will be commissioned, which is well above the previous record of 45 mmtpa in 2005 and a tripling of the 21 mmtpa of 2018. The frontrunners to hit their FID include the $27 billion Arctic LNG-2 project in Russia, Mozambique, and three projects in the U.S. Related: BP Beats Estimates, Posts Highest Profit In Five Years

Furthermore, several major economies are increasing pressure on their domestic coal industry: Korea is set to approve a plan to boost taxes on imported coal, Japan intends to increase scrutiny on 8 GW of planned coal-fired plants, India aims to reduce particle matter by 20 to 30 percent, and Germany’s coal phase-out could start as soon as 2022. The sheer size of these developments could significantly improve the position of LNG producers for the foreseeable years.

A relative slow start

Despite these developments, 2019 will face a slow start when it comes to LNG prices. Assuming the relatively mild weather continues in northeast Asia and Europe, prices will remain low for the time of the year. Wood MacKenzie predicts an average price of $6.90 per MMBtu in Europe compared to $8 MMBtu in 2018. Furthermore, prices in Asia should hover around $8.50 per MMBtu, while it was $10.30 MMBtu in 2018.

Energy companies and other investors make investment decisions based on long-term demand and price development predictions, not short-term. Therefore, it is unlikely that the relatively low prices will seriously harm this year’s FID moment for many projects.

By Vanand Meliksetian for Oilprice.com

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