LNG Glut Set To Worsen Considerably Over Next 3 Years
LNG supplies are set to boom over the next 3 years.
The IEA’s 2015 World Energy Outlook expects LNG export capacity to grow rapidly in the short-term, with major new sources of supply coming mostly from Australia and the United States. Indeed, this first wave of new LNG capacity is already under construction and many projects are nearing completion.
Australia is expected to nearly quadruple its LNG export capacity between 2014 and 2018, as it adds 58 million tonnes per annum (mtpa) of LNG export capacity. The U.S. is expected to see its first shipment leave its shores in the first quarter of 2016 when Cheniere Energy’s Sabine Pass facility comes online. By 2020, the U.S. could add 44 mtpa, which could be enough to make it the third largest exporter behind just Qatar and Australia.
But the next phase of expansion is less certain. LNG prices have collapsed, in part because of the plummeting value of crude oil. But also because demand is not turning out to be quite as strong as previously anticipated.
Take Japan, for instance. Tokyo Electric Power (Tepco), a utility and a major purchaser of LNG in Japan, has actually begun importing less LNG on the spot market and for short-term contracts, with imports down by a third for the period of April to September. Plummeting spot purchases helps to explain why spot prices for the Japan-Korea Marker (JKM), a benchmark for LNG in East Asia, have crashed over the past year. Prices have fallen below $7 per million Btu (MMBtu) recently, down from a peak of $20/MMBtu in early 2014. Spot prices are down more than 10 percent from September.
The problem of soft LNG demand will grow worse as Japan slowly returns to nuclear power, a trend that has already begun.
China is expected to be the source of future LNG growth, so a lot of the planned export capacity has been financed with an eye towards shipping LNG to China. But China’s imports of LNG are also down by 3.5 percent this year. China’s PetroChina and Cnooc recently resold some of the shipments that they received; early signs of a brewing glut in supply.
“The entire industry is worried because it is hard to tell when China’s demand will pick up again,” an LNG strategist told the Wall Street Journal earlier this month. “Rising demand from smaller countries such as Pakistan, Egypt and Bangladesh is not enough to offset the declining demand from north Asia.”
In its recently released World Energy Outlook, the International Energy Agency concludes that the LNG markets have demonstrably shifted in the favor of buyers over sellers, as supplies are set to come online at a much faster rate than demand justifies. The IEA says that “there is also an increasing share of gas available on a short-term basis,” and the “net result over the next few years is expected to be that significant volumes of gas will be looking for a home, at a time when lower oil prices are keeping down the price of oil-indexed gas sold under long-term contracts and when large new LNG plants are scheduled to start operation.”
That presents problems for LNG markets. It is not clear “who will absorb the additional gas that is set to be available on a shorter term basis, particularly given recent downward revisions in the outlook for economic growth,” the IEA concludes. Even when considering the growing appetite in China, India and other rapidly growing Southeast Asian nations, “it is unlikely, in our view, that Asian markets can easily take all of the available additional volumes.”
The current market turmoil has created a once in a generation opportunity for savvy energy investors.
Whilst the mainstream media prints scare stories of oil prices falling through the floor smart investors are setting up their next winning oil plays.
For buyers, this presents opportunities. But gas may need to get down to $5/MMBtu for European countries, for example, to “swing back to gas” for electric power. Coal prices are incredibly low, and carbon prices are not high enough to force power producers to switch to gas.
That suggests that the next wave of construction for LNG export terminals – those that have not been greenlighted with a final investment decision – may not get off the drawing board. The IEA sees U.S. LNG projects in a good position, since many are converting brownfield facilities, and thus have lower costs. Gas tolling arrangements also remove risk from exporters.
But more projects in Australia, for example, face much steeper obstacles. Shell’s withdrawal from the Arrow LNG project is indicative of the challenges facing higher cost LNG projects in Australia. Projects planned on the Pacific Coast of Canada, or in East Africa, also face uncertainties because of their higher costs.
Source: IEA WEO 2015
On the other hand, LNG projects come and go in waves (see charts). So, there will likely be a time at which supplies become tight, and new construction once again makes sense. It is the near term in which there is a lot of uncertainty. Projects that are not already under construction could be delayed for several years.
https://oilprice.com/Energy/Gas-Prices/LNG-Glut-Set-To-Worsen-Considerably-Over-Next-3-Years.html