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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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LNG Sector Dangerously Dependent On Chinese Demand

The liquefied natural gas industry has become too reliant on demand for the fuel from China, industry executives warned at last week’s CERAWeek, advising players in the LNG field to try and broaden their markets before they begin suffering the impact of this overreliance.

Reuters quotes several energy industry executives as reminding their peers demand for LNG in China this year will be slower than previously expected and lower than the last two years. Also, they said the demand producers have seen come from China during these last two years does not necessarily have to be indicative of future demand. The core of the message is simple: Take it easy.

“We are becoming too reliant on China in the last couple of years,” the chief executive of Australia’s Woodside Petroleum said. “It worries me because we’ve seen others drop off in the same period for demand.”

“I would caution the LNG industry not to make linear extrapolations of Chinese LNG demand based on what you’ve seen in the last two years,” the chairman of Japan’s JERA, Hendrik Gordenker, said.

“We need to continue to develop a broader market base, or else we run the risk that other commodities have had of just becoming so focused on Chinese growth that it can become extremely addictive,” Woodside’s CEO, Peter Coleman, added.

Indeed, LNG players need to be cautious and use the bad example of all other commodities whose prices swing wildly on a whiff of trouble in Chinese demand and have done so since China began emerging as the new world economic powerhouse. But what can LNG producers do to avoid fallout in the shape of depressed prices and, ultimately, losses?

For one thing, they can and should watch the trends. Shell’s latest LNG Outlook forecast LNG demand will grow steadily in the long term and the market might swing into a deficit if more production capacity does not come online. However, that’s the long run. In the next 12 months, demand for the fuel will only rise by 16 million tons versus a jump in supply of 33 million tons, according to Poten & Partners, an energy consultancy specializing in LNG. Related: The Khashoggi Killing Is Driving Saudi Oil Diversification

Spot prices are low, and what’s worse, Asian buyers are less willing to commit to long-term supply deals, a recent analysis from S&P Global Platts said. These long-term supply commitments are vital for the commercial viability of planned but not yet built LNG facilities, but also for the profitability of already built ones. There has been talk that Cheniere could get ahead by striking a long-term supply deal with Sinopec but that’s contingent on a trade deal between Washington and Beijing.

In China specifically, it would pay to note the reasons for the demand slowdown. These include, “Economic slowdown, a more considered approach on coal-to-gas switching and increased domestic infrastructure availability will mean LNG demand will slow in 2019, from the 40-45% growth we have seen in 2017 and 2018,” Wood Mackenzie said in its 2019 LNG outlook in early January.

The way to beat this slowdown is to seek new markets, on the one hand, and wage war on coal to stimulate more LNG demand, according to the energy executives attending CERAWeek. The latter is a relatively straightforward deal and fits in with a drive towards cleaner fuels altogether. The former might be tricky, however. The most logical alternative to China is India, another powerhouse. Yet, infrastructure constraints there are making LNG demand growth slower than it could have been.

In this situation, producers who already have long-term supply deals are once again better placed to weather the temporary slowdown in demand than the newer kids on the block who have yet to secure long-term buyers of their LNG.

By Irina Slav for Oilprice.com

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