• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 1 hour GREEN NEW DEAL = BLIZZARD OF LIES
  • 8 hours How Far Have We Really Gotten With Alternative Energy
  • 10 hours If hydrogen is the answer, you're asking the wrong question
  • 4 days Oil Stocks, Market Direction, Bitcoin, Minerals, Gold, Silver - Technical Trading <--- Chris Vermeulen & Gareth Soloway weigh in
  • 6 days The European Union is exceptional in its political divide. Examples are apparent in Hungary, Slovakia, Sweden, Netherlands, Belarus, Ireland, etc.
  • 23 hours Biden's $2 trillion Plan for Insfrastructure and Jobs
  • 5 days "What’s In Store For Europe In 2023?" By the CIA (aka RFE/RL as a ruse to deceive readers)
Europe Has To Live With Unpredictable Natural Gas Prices

Europe Has To Live With Unpredictable Natural Gas Prices

Governments and markets should be…

Electric Dream On Pause? UK's Fuel Car Ban Faces Delay

Electric Dream On Pause? UK's Fuel Car Ban Faces Delay

Car manufacturers are urging the…

Wim de Vriend

Wim de Vriend

Wim de Vriend, a native of the Netherlands, lives on the U.S. West Coast.  He has degrees in international business from Nyenrode University in the…

More Info

Premium Content

Where Is The LNG Glut Going?

(Click to enlarge)

This is part 3 of a Part 4 articles series, part 1 can be found here and part 2 here

Depending on the sources and the timeliness of their information, you can find estimates of new liquefaction capacity coming on stream worldwide, by 2020, from 121 to 145 Mtpa. Over half of the high estimate of 145, according to FERC data, consists of the U.S. LNG export terminals now under construction, 83 Mtpa, although I don’t know if the 83 Mtpa includes any production trains on which its sponsor, particularly Cheniere, has changed its mind since the new regime took over the company.

The other major addition to global liquefaction will come from Australia, whose LNG capacity is expected to increase by 62 Mtpa, from 24 to 86 Mtpa.

The American 83 Mtpa and the Australian additions of 62 together make 145 Mtpa of new capacity. Let’s take the average of 121 and 145, which is 133.

At this point I am not including the second wave that could be generated by plants still in the approval process but not yet under construction. Neither am I counting minor new players elsewhere in the world, which may merely substitute for inactive terminals like those cited in part (1).

By the end of 2014, the world’s liquefaction capacity stood at 298 Mtpa. This confirms a rule of thumb that global LNG trade is about 80 percent of global capacity. The difference may need to be maintained for various reasons, not all foreseeable: maintenance and supply, earthquakes or terrorists destroying pipelines, filling and chilling of new storage tanks, and more.

If we deduct 20 percent for idleness from the new capacity also, then instead of having to absorb 133 Mtpa of new LNG by 2020, the world will only have to absorb 106 Mtpa. Therefore LNG trade will need to grow from about 240 Mtpa in 2015 to 346 in 2020, which requires a CAGR of 7.6 percent. CAGR is the Compound Annual Growth Rate, which works just like a compound interest rate in banking: growth on top of growth.

But with how much confidence can we expect a future CAGR of 7.6 percent, when the most recent five years of LNG trade saw no growth at all? Can ambitious would-be LNG exporters waiting in the wings for their approvals be sure that by 2020 the world will have ‘soaked up’ that first 106 Mtpa? Building LNG liquefaction terminals is expensive, and it takes years. If they can reasonably expect that the market will clear by 2020, it would be prudent to start the planning and construction process. Otherwise, no. Related: OPEC Report Suggests Massive Oil Price Rebound

During ten years of past growth from 2000 to 2010, global LNG trade grew from roughly 100 Mtpa to 210 Mtpa, which made a CAGR of 7.7 percent. (I took the annual numbers from the graphs, so they may be slightly off.) So if during 2016-2020 we could count on a CAGR like the one from 2000 to 2010, we could trust the market to absorb the additional 106 Mtpa by 2020.

On the other hand, if we take fifteen years instead of ten years of growth, 2000 to 2015, when trade grew from 100 to 240 Mtpa, we get a past CAGR of only 6.0 percent. That CAGR is lower because it combines the first 10 years when growth was higher with the most recent 5 years when there was no growth. Also to be kept in mind is that both WoodMac and E&Y had predicted continuing growth during what turned out to be 5 flat years. So much for the indicators from the past.

For the future, WoodMac predicted market growth from 250 Mtpa in 2015 to 360 Mtpa in 2020, which comes to a CAGR of 7.6 percent. From 2020 to 2025 Wood Mac projected growth from 360 to 440 Mtpa, implying a CAGR of only 4.1 percent between those years.

E&Y projected growth from 310 Mtpa in 2015 to 390 in 2020, which gave a CAGR of 4.7 percent during those same years, and from 390 to 450 Mtpa during 2020-2025, which came to a 2.9 percent CAGR. Listed below are all these CAGRs:

(Click to enlarge)

In this table, the percentages in the 2020 column express the calculated CAGRs during the five years 2016-2020, which were 7.6 percent for WoodMac and 4.7 percent for E&Y. In the same way, the percentages in the 2025 column reflect the CAGRs for predicted LNG sales growth during the years 2021-2025.

At first glance the reader might object that these calculations are unnecessary because both consultants’ predictions for the year 2020 show numbers higher than 346, more than adequate to meet our target of 346 Mtpa by 2020. Related: The Great Glut: Why LNG Markets Might Not Balance Before 2025

But that would lose sight of the fact that both consultants’ predictions for 2015, which were 250 and 310, have already missed their mark, since 2015 only saw trade of 240 Mtpa. That fact of history puts into question whether in 5 years, by 2020, the world will not only have balanced its LNG supply and demand by absorbing an addition of 106 Mtpa, but will also be ready to absorb a second addition of similar size. To answer this, we need to decide above all what kind of CAGR we can reasonably expect between now and 2020. Without making a reasonable guess at that, we cannot say anything sensible about the probable fate of a second wave of 100 Mtpa of LNG.

The essence of that question is the probability of the best-case scenario, a CAGR of 7.6 percent between now and 2020. While such a CAGR cannot be ruled out, it is not terribly likely either because:

1. We know that during its earlier growth period, 2000-2010, the global LNG market did grow at a CAGR of 7.6 percent. But growth rates are usually highest early on. Besides, during the 5 years that followed, 2011-2015, the global LNG market was stagnant. It had a CAGR of 0 percent.

2. To achieve a 7.6 percent CAGR now, the market would have to shift from standstill into high gear. More supply and lower prices may help that transition, but it would take time.

3. Predictions by the IEA, WoodMac and E&Y for recent years have already proved overoptimistic. So have those by LNG traders like the BG Group, not to mention the expectations of virtually all would-be LNG exporters.

4. With some exceptions, growing economies have growing energy needs, but recent economic forecasts have been downbeat, with many analysts predicting another worldwide financial crisis and/or recession. China has seriously slowed down and there is very little growth elsewhere; commodities have crashed; central banks have caused bubbles in stocks and real estate without stimulating much real growth; there is more debt than in 2007; in short, instead of confidence there is a great deal of apprehension. None of that is positive for a commodity which, despite dramatic price cuts, in terms of MMBtu per dollar, is still more expensive than other fuels.

On the positive side, as already noted there is a lot of regasification capacity. Assuming those receiving terminals are in the right places and connected to pipelines, future new buyers might be accommodated faster.

Adding up all this, a 7.6 percent CAGR during 2016-2020 cannot be ruled out but seems highly improbable. The same could be said of a CAGR of 0 percent, meaning a continuation of the 5 flat years. So I will make 0 percent the low end of the range, with the proviso that if a serious crisis occurs – a major war, for example – the CAGR could well fall below 0. But both ends of the scale have low probabilities.

 

The table above confirms that balancing the market by 2020 with the first 106 Mtpa now being built would require the improbable though not impossible CAGR of 7.6 percent. It’s unnecessary to list the numbers at the opposite end of the range, because a CAGR of 0 percent would not change the beginning number.

ADVERTISEMENT

The table also shows what happens if we apply CAGRs halfway between the two extremes, 3 and 4 percent. At a CAGR of 4 percent, that first 106 Mtpa could be exceeded by 2025, in 10 years. A 3 percent CAGR would extend the process to 2028: 13 years. Either one of these seems more likely than one of the extremes, ceteris paribus. Related: Why India Matters More For Oil Than China

However – and this is a big ‘however’ – with current estimates of future global economic growth, even CAGRs of 3 or 4 percent may be overoptimistic. Remember: our shipment goal is 240 + 106 Mtpa = 346 Mtpa.

If the LNG market grows at the same rate as the global economy is expected to do, i.e. at not more than a 2 percent CAGR, demand and supply will not balance by 2020 or even by 2025. At a 2 percent CAGR, passing 346 would take until 2033, all told 17 years. Once again, ceteris paribus.

Check for yourself: Investopedia has a very convenient CAGR calculator that you can find here.

Barring unforeseen circumstances, it seems that those aspiring LNG operators still pursuing their permits ought to put their plans on ice for 5 years, or better yet 10, or until the market settles into a more predictable pattern.

By then they may be glad they waited because we may have a very different business environment due to changes in terminal technology. Already FSRUs (Floating Storage & Regasification Units) are proving to be good alternatives to land-based regasification terminals. Their advantages include less complicated permitting, lower construction costs and flexibility, since unlike land-based terminals they can be moved where needed, thus prolonging their useful lives.

At the liquefaction end of LNG, changes will come more slowly due to technical challenges and higher costs, but this year or next the Prelude FLNG (Floating Liquefied Natural Gas) vessel, offshore Western Australia, should clarify the future of floating liquefaction. In American terms, at a cost between $11 and $13 billion, Prelude is not cheap for a production capacity of 3.6 Mtpa, although in the high-cost Australian LNG environment it doesn’t look so bad, and in addition to the 3.6 Mtpa of LNG it will also produce large volumes of condensate and LPG.

Ledesma, Henderson & Palmer: ‘The Future of Australian LNG exports: Will domestic challenges limit the development of future LNG export capacity?’, Oxford Institute for Energy Studies, September 2014.
‘LNG Markets & Trade’ The International Group of Liquefied Natural Gas Importers (GIIGNL), 2015; http://www.giignl.org/lng-markets-trade-0

By Wim de Vriend for Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment
  • JHM on April 18 2016 said:
    Any growth in LNG demand is overly optimistic. New natural gas plants are becoming priced out of the market even at $2/MMBtu for fuel. Wind, solar and increasingly batteries winning.
  • Gordon Powell on April 18 2016 said:
    The situation for CAGR growth is even less than you specify. The reality of cold fusion aka LENR is now beyond doubt. Practical dissemination of engineered ready to use versions of the technology is now underway and will accelerate rapidly. In ten years, you will not recognize the world energy market.

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News