LNG sector to get impetus from global demand

Number of global and regional drivers for future LNG development, such as energy efficiency and environmental policy changes, which are expected to lead to the decarbonisation of several sectors including the shipping and transportation industries

Colin Chapman is the president of Euro Petroleum Consultants.
Colin Chapman is the president of Euro Petroleum Consultants.
Ekaterina Kalinenko is a project manager at Euro Petroleum Consultants’ Moscow office.
Ekaterina Kalinenko is a project manager at Euro Petroleum Consultants’ Moscow office.

Over the next three years, the LNG industry could expand up to 450-550 bcmpa of capacity with a large number of important large-scale projects (60+) in various stages of development.

LNG demand is expected to grow at a rate approaching 4% per year depending on price differential between pipeline gas and LNG. There remains a cautious attitude from investors with regards to backing large-scale investment projects, which is due to the current uncertainty of future LNG price levels. In this context it seems more likely that lower-cost ‘brownfield’ projects will be given preference to more costly ‘greenfield’ projects due to additional investment needed for infrastructure.

There are a number of drivers for future LNG development, such as energy efficiency and environmental policy changes, leading to decarbonisation of the shipping and transportation sectors; more competitive global LNG pricing vs gas prices as a feedstock cost; increased gas production and reserves in the US and in other regions (including shale); global economic growth and new markets; increased regasification and pipeline infrastructure; technology developments and options for gas monetisation, e.g. Methanol to Olefins (MTO) and Methanol to Gasoline (MTG).

Investment levels in Global liquefaction capacity are expected to rise by 40% (about 180 bcm) in 3 years (2020), reaching around $200bn by 2020 (+42% compared to 2012-2016 period), a large part of which will be spent on import facilities.

This fact has already had a significant impact on LNG prices. According to Deloitte’s research the majority of this growth will focus on Australia (+11% of market share compared to 2011) and the United States (+9%), resulting in a slight share drop for previous market leaders – Middle East (-14%), Asia (-6%) and Africa (-8%). Impact on other regions such as South America, Canada & Europe will be rather insignificant, even though Russia is expected to gain 2% of market share (equivalent to 13 mtpa of LNG).

Global LNG demand is forecasted to increase by around 45% from 250 mta to reach 350 mta by 2020. Growth in world trade is expected to increase by 10% in 2017 to about 285 mta. In China, LPG has replaced gas in certain sectors due to a price reform, the country needs more gas than expected, gas demand is up 12% per annum. It is expected that LNG demand, especially in China and India, will continue to grow, and the traditional LNG exporting countries such as Malaysia, Indonesia, and even Egypt may need to import some quantities to offset the deficit (as well as Kuwait, the UAE, Chile, Brazil, Argentina, Bangladesh, Pakistan and other countries).

Countries in the ASEAN region, such as Thailand and Singapore, have become new LNG market entrants, while the Philippines and Vietnam are planning to become LNG importers, Brunei will maintain its status as a significant LNG exporter.

Europe will need to play an important role in balancing the global LNG market. New markets in Ghana, Namibia, South Africa, Myanmar, Panama, El Salvador, Jamaica, Bahrain, Morocco and Colombia are ready to absorb some extra supply of LNG (+~50 mtpa by 2030), but they are still in the state of development.

The markets of North Asia are mature and will remain major buyers of LNG; much of the expenditure in Asia is attributed to the construction of LNG carriers. Japan is now the world’s largest consumer of LNG, importing approximately 89mn tons (approximately 1/3 of the total demand in 2014). Japan and South Korea are ready to consume 125 mtpa (55% of global LNG exports and 70% of all Asian imports), but Japan’s LNG imports have been forecast to fall by 3.2% to 80mn mt in 2017 due to competition with alternative fuels.

Additionally, structural changes in supply / demand in different regions has encouraged different initiatives to create LNG trading hubs. A Singapore Hub could potentially become a platform for 24 companies operating in the Asian LNG area, sufficiently neutral in terms of politics, but, with a capacity of only 6mn tonnes, it will not be competitive enough to impact and define prices for Asia. Plus, it is quite far from the major Asian LNG markets, meaning additional shipping costs.

Global energy markets are undergoing fundamental changes, with energy demand slowing down in the OECD countries and booming in the non-OECD countries. There will be shifts on the liquid fuels; international gas trade will be strongly driven by LNG.

While there is currently a global oversupply of natural gas, including LNG, the lack of investment in the development of resources will eventually balance out the market disproportions.

Demand, despite a slower pace in Asia, will still grow between now and 2020 and is expected to reach a peak of 650 bcm in 2030. Final investment decisions (FID) which are coming online, primarily in the US and Australia, will surpass global demand levels.

If we review some of the Projects that have been completed and those in various stages of development, we can see that over the last two years, 6 LNG projects started up in Papua New Guinea, Australia and in the US. In the mid-term many projects are being evaluated such as BP (Tangguh LNG train 3 – 3.8 mtpa), Petronas (Pacific North West LNG train 1-2 – 6.4 mtpa), Anadarko (Mozambique LNG train 1-2 – 5.0 mtpa), Pieridae Energy (Goldboro LNG train 1-2 – 5.0 mtpa) and LNG Limited (Magnolia LNG train 1-2 & Bear Head LNG train 1-2 – both 4.0 mtpa).

Implementation will depend upon the robustness of these investments in the new market situation.

North America is expected to become the dominant region in terms of CAPEX in new LNG facilities over the 2017-2020 (about $73bn. forecast expenditure committed) as well as 17% of global export capacity.

Both for the North American and East African LNG industries Asia seems to be more attractive as an end-buyer rather than Europe, considering the current state of prices.

Australia’s LNG output in 2016-2017 is planned to continue to rise with parallel growth in export capacity – about 51 mmta (+20% compared to previous fiscal year) plus 15 mmta of additions, the value of Australia’s LNG exports is forecast to increase by 41% ($17.4bn). Higher export volumes will be driven by the addition of around 15mn mt of LNG export capacity, bringing total operational capacity to around 66mn mt by mid-2017.

Even though Europe’s gas demand is decreasing, its dependence on gas imports is increasing: on average, the EU’s members import about 66% of their natural gas, and 8 countries have 100% gas import dependency; Russia supplies approximately 33% of Europe’s gas.

Russia’s Novatek plans to launch LNG production at Yamal in 2017, the second and the third trains are expected to be launched in 2018 and 2019, total capacity will be 16.5 mta of LNG.

We can see that future developments in the LNG global markets are attracting a lot of attention and future investments will need to be analysed to evaluate this fast evolving sector and to take into account the new fields which are currently being developed.

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