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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Major LNG Projects On the Rocks As Competition Escalates

LNG shipping

Throughout the Pacific and East Asia, developments in liquefied natural gas (LNG) look set to upset markets and put further pressure on this expanding, though challenging emerging sector.

With the world’s highest demand for LNG coming from markets in East Asia, and with major producers like Australia, Canada, Qatar and the U.S. chomping at the bit for a piece of that market, competition for LNG production and market share looks set to escalate. But uncertainty about Asian demand, particularly in China, and the likelihood of low prices over the long-term, casts doubt on whether the increased production from Australia is really sustainable.

In Australia, where more than $180 billion has been invested in new energy production infrastructure, LNG producers reported a banner month, as LNG exports rose by 500,000 tons to a total of 3.6 million tons during June 2016, an increase of 18.5 percent from May. After a trying few months, and despite political pressure on the country’s energy sector, producers were able to increase shipments to Japan (Australia’s major energy customer), as well as South Korea and China.

Woodside Petroleum’s North West Shelf project reported a month of full production, delivering 13 cargos for a total of 1.37 tons, exceeding the facility’s production goal of 16.3 million tons per year. Woodside is improving on a solid June by buying a 35 percent stake in ConocoPhillip’s off-shore venture in Senegal, worth $US430 million. The move comes as Woodside hopes to improve its growth potential and ConocoPhillips conducts a review of its deep-water investments.

While South Korean and Japanese LNG demand has begun to trail off, Chinese demand is growing. Of the 44 cargoes sent from Australian terminals in June, 15 were bound for China, while over half were destined for Japan. Chinese demand is expected to grow by 15 percent between 2016 and 2021, though the country is investing heavily in domestic production. In 2015 China supplied 69 percent of its own domestic natural gas and the bulk of its reserves are located in the remote west and north of the country, while the major centers of LNG demand remain in the urbanized east. Eastern China currently has LNG terminals sufficient for receiving 17.5 million tons per year. Related: China’s Oil Output Tanks , Hits 4 Year Low

Oil consumption, which currently increases by 4.5 percent per year, is expected to decline to 2 percent per year by 2035, according to the state-owned China National Petroleum Corp. (CNPC), though natural gas is expected to replace coal as a major provider for Chinese industry. After years of runaway growth in energy consumption, China is now looking to slow its demand for energy products, particularly coal and oil.

If Australia hopes to tap growing Chinese demand, it appears well-positioned to do so. Setbacks continue to plague key Australian LNG projects, however. In early July Chevron’s massive Gorgon LNG project, one of the world’s most expensive energy operations, announced another shutdown due a gas leak. As of mid-July Gorgon remained closed, having delivered only a two shipments since it’s officially opened early in 2016, a single shipment in February and one on 3 July.

More bad news comes from Standard & Poor’s which predicts immense pressure on Pacific oil and gas due to low profitability and the likelihood of low prices for the rest of 2016. Other LNG ventures have been scrapped, including Shell’s planned facility in British Columbia, a joint venture with Asian partners. The facility, run by LNG Canada, would have been able to process 6 million tons per year, but fears over low prices and anemic demand, as well as Shell’s general decision to retrench and pull back from excessive investments, convinced the company to indefinitely postpone the project. Related: Oil Is Facing The Perfect Storm

The United States, where companies like Cheniere have worked hard to develop LNG export capacities, face the challenges of high competition in the Pacific. Citibank analysts reported on 13 July that U.S. LNG is too expensive to compete in the Pacific, even with the newly-upgraded Panama Canal allowing for larger shipments. The canal expansion, completed on 26 June, was expected to be a game-changer, as before only 6 percent of the world’s LNG fleet could pass through the locks, whereas now only the largest class of ship is incapable of passing through. But the conditions of the Pacific market are such that, without an increase in price, U.S. LNG simply can’t compete.

Another challenge to future LNG growth comes from Japan, where regulators are considering altering existing rules and allowing LNG shipments to be re-sold, potentially under-cutting producers and putting downward pressure on prices. Such a move would disrupt existing contractual relations and potentially sever the link between LNG and crude prices. Existing restrictions on re-sale essentially force importers to consume whatever LNG they import; dropping these restrictions would allow importers to essentially become LNG merchants themselves, re-selling unwanted or unused LNG to other customers.

June’s Australian report indicates that producers there will continue with their scheduled increases, even as the market remains tight. Developments in Canada and the U.S. indicate that the long-predicted flood of North American LNG will be postponed, perhaps indefinitely.

Meanwhile, the future of Asian demand, the only realistic driver of world LNG consumption, appears uncertain.

By Gregory Brew for Oilprice.com

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  • Rick Bronson on July 16 2016 said:
    Hello Australia, thanks for investing $180 billion in LNG. Unless the transport sector moves to Natgas, there will not be much demand for this fuel.

    Please advice or just build a string of CNG/LNG fueling stations in these 3 east Asian countries.
    China, Japan & Korea and naturally they will buy more fuel from Australia.
  • smoky on July 17 2016 said:
    LNG is a buggy whip technology. No country on earth will want to pay the expense of liquefying natural gas and shipping it great distances when clean, renewable energy like wind, solar, and hydrogen are becoming so cheap. These technologies will continue to fall in price while natural gas will inevitable increase as governments require environmental controls and as the world realizes that we can't burn all the known fossil fuel reserves without driving our climate permanently out-of-control.

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