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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Is The LNG Floating Storage Boom Over?

LNG

The relatively young industry of projects using floating storage and regasification units (FSRU) has enjoyed boom years since 2015 as many new importers of liquefied natural gas (LNG) used these floating types of carriers that are cheaper than having to build an entire onshore LNG import terminal.

But the golden years of the FSRU, the first of which was used in 2005, may be over, at least for now, because the voracious Chinese natural gas demand has upended the LNG market and made less urgent the need for FSRU projects in new and much smaller markets. The FSRU market is still set to grow, but at a slower pace than in the past two years, according to analysts.

Before 2017, a rising trend among emerging markets to seek the cleaner-than-coal fuel raised the number of LNG importers around the world, and many of the newcomers to the LNG ‘buyers’ club’ used the FSRU option.

At around US$300-400 million, FSRU projects cost half the price of an onshore terminal. FSRUs are also flexible because the vessel can be used elsewhere once it is not needed.   

But then came the winter of 2017-2018 and the massive Chinese switch from coal-fired to natural gas-fired energy and surging LNG demand in Asia’s biggest market. This resulted in China lapping up global excess LNG supply and making FSRU projects in other—smaller—countries less attractive.

Related: Chinese Oil Demand Growth Could Slow Down Soon

“In the last year or so, FSRUs have suffered a bit of a setback from the stellar growth they were previously enjoying,” Andrew Buckland, Wood Mackenzie’s global LNG trade and shipping principal analyst, told Reuters.

“Some of that is down to conditions unique to particular proposed projects. But a lot of it is more to do with demand being stronger than expected in existing conventional markets,” Buckland says.  

The Chinese push to cut pollution and make millions of households switch to natural gas from coal for heating resulted in China becoming the world’s second-largest LNG importer in 2017, outpacing South Korea and second only to Japan, the U.S. EIA said in February. Chinese LNG imports surged 46 percent last year. Despite the fact that China increased its domestic production and pipeline imports last year, natural gas shortages in northern China led to record levels of LNG imports during the winter. Overall, natural gas imports accounted for 40 percent of China’s 2017 natural gas supply, and LNG made up more than half of those imports, the EIA said.

China is now looking to double its LNG import terminals, and is also expanding its underground gas storage close to major demand centers and to natural gas pipelines.

The change in the LNG demand market, especially in China, has led to slowdown of planned FSRU projects in countries like Chile or South Africa.

“Prior to last winter, when it looked like there’d be excess LNG, creating new demand centers via FSRUs looked a more attractive strategy than it does now,” WoodMac’s Buckland told Reuters. “Which is not to say they won’t come back to that in the future,” he added.

Major players in the FSRU market are looking to combine FSRU with other business models such as LNG-to-power, or “gas stations” for ships that use LNG as a fuel in north Europe. Related: Houston To Get Its Own Crude Oil Futures As U.S. Exports Rise

“The old ‘FSRU only’ business model is becoming crowded with pressure on returns,” one of the leading companies in the sector, Golar, told investors last month, and said it would turn to LNG-to-power projects to boost returns. 

Still, FSRU technology will continue to unlock demand in new markets, especially in South and Southeast Asia, according to Bloomberg New Energy Finance’s (BNEF) Global LNG Outlook 2018. South and Southeast Asia are expected to become the main drivers for the LNG imports in the world in 2022-2023, said Maggie Kuang, head of Asia-Pacific LNG analysis and lead author of the report.

For the LNG market, global imports this year are expected to set a new record and grow by 7.2 percent, BNEF said.

“A further surge in demand to 2030 will be driven by environmental measures in China, rising power generation in South and Southeast Asia, and a reduction in domestic gas production in Europe.”

By Tsvetana Paraskova for Oilprice.com

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  • Clay on July 23 2018 said:
    Interesting article but I’m not sure I understand why increased demand from China reduces demand for FSRU?... maybe because increased demand from China increases price of lng to the point that FSRU projects in smaller countries are not longer cost justified?

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