Coming Up - How the Rebounding LNG Market Will Help U.S. Gas Producers

There’s good reason to believe that the international LNG market has turned a corner, with demand and LNG prices on the rise and with a number of new LNG-import projects being planned. That would be good news for U.S. natural gas producers, who know that rising LNG exports will boost gas demand and support attractive gas prices. It also would help to validate the wisdom of building all that liquefaction/LNG export capacity now nearing completion. Today we look at recent developments in worldwide LNG demand and pricing and how they may signal the need for more LNG-producing capacity in the first half of the 2020s.

Some have worried that the liquefaction “trains” and LNG export facilities being built along the U.S. Gulf Coast (plus one along Chesapeake Bay in Maryland) may be coming online at precisely the wrong time. After all, the pace of worldwide LNG demand growth slowed in 2014-15, new Australian and U.S. liquefaction/export capacity seem poised to flood an already over-supplied LNG market, and LNG spot prices only a few months ago, fell to less than $5/MMBtu­­—almost $15 lower than where they stood in early 2014. As we said in our Catch a Wave blog series, 14 liquefaction trains with a combined capacity of about 63 million tonnes per annum (MTPA) of LNG (enough to consume more than 8 Bcf/d of gas if all the trains were running most of the time) will be coming online in the 2016-20 period; the first two 4.5-MTPA trains at Cheniere Energy’s Sabine Pass LNG facility in southwestern Louisiana are already producing LNG that is being shipped to South American, European and Asian buyers. As many as two additional trains at Sabine Pass may start super-cooling natural gas into LNG in 2017, as may Dominion’s single-train, 5.25-MTPA Cove Point facility in Maryland. Another nine trains along the Gulf Coast (combined capacity, ~40 MTPA or nearly 6 Bcf/d) are slated to come online in 2018-20. All of that new capacity wouldn’t be so much of an issue if the U.S. were the only place where new liquefaction trains were being built. (Wouldn’t that be nice?) But Australia has been on a train-building binge of its own; it will be adding nearly 30 MTPA by 2020. That, plus a handful of other new liquefaction trains that will be starting up in Indonesia, Russia and Malaysia, will leave the world with considerably more LNG-producing capacity than it will need until sometime in the 2020s.

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But are things really as bad as all that? No, they probably aren’t, especially if you take a longer-term view. As we said, there are signs that the international LNG market’s mid-decade funk may be over, or that it’s at least in the process of ending. One indicator is that, as of this week, spot prices in eastern Asia­­—the epicenter of LNG demand—have risen to about $9/MMBtu, a gain of ~80% from the ~$5 spot prices of a few months ago. LNG demand is also up in 2016 compared to 2015—not necessarily at the two biggest LNG importing countries (#1 Japan and #2 South Korea), but declines there were more than offset by rising LNG demand from up-and-comers like #3 China and #4 India and from the six countries (Pakistan, Jamaica, Lithuania, Poland, Egypt and Jordan) that started importing LNG in 2015-16 (see Figure 1).

Figure 1; Source: Cheniere Energy

Even with the recent bump-up in LNG prices, the number of LNG import and regasification projects being planned (not just in Asia, but in Africa and other places too) continues to grow at a fast clip. That’s not surprising, really—after all, decisions to invest in expensive LNG-receiving infrastructure (and, in many cases, new gas-fired power plants tied to these projects) are not made lightly, and are based at least in part on the expectation that new liquefaction/export capacity and fiercer competition among LNG suppliers will keep prices within reasonable bounds over the long haul.

The new import/regasification capacity being planned and built comes from two categories of buyers: existing LNG buyers like China, India and Pakistan that are adding new regasification capacity, and countries like Vietnam, South Africa and Colombia that until now have not imported LNG. There are also two general categories of import/regasification infrastructure: traditional, land-based projects (like Sabine Pass, Cove Point and other U.S. import/regasification facilities built back when the U.S. was expected to become a big LNG importer) and floating storage and regasification units (FSRUs; see Take Me To the River). FSRUs, pioneered by Excelerate Energy, have been around for more than a decade but have re-entered the spotlight in the past year or two, their renewed popularity driven in part by their shorter lead times (from project commitment to first LNG delivery) and in part by their lower up-front cost.

More than 30 LNG import/regasification projects with a combined capacity of over 11 Bcf/d either came online around the world in 2016 or are under construction (as of October) and scheduled to begin operation during the next three years, according to the International Energy Agency (IEA). About 70% of the new capacity is land-based and 30% is from FSRUs. Asia is up front as far as near-term incremental import capacity and demand are concerned. Some 3.5 Bcf/d (or just under one-third) of the capacity is being added in China; IEA’s latest forecast sees Chinese demand for LNG more than doubling by 2021, from just over 3 Bcf/d now to ~8 Bcf/d in 2021 (dark blue solid and dotted lines in Figure 2). 

Figure 2; LNG demand, 2005-16 and forecast to 2021; Source: IEA

Two LNG import/regasification projects (total capacity, ~1.3 Bcf/d) are under construction in India (which already has four such facilities), and others are in earlier stages of development. IEA sees India’s demand for LNG rising more slowly than China’s, to about 3.6 Bcf/d by 2021 from the current 2.7 Bcf/d. (medium blue lines). Pakistan and the 10 members of ASEAN (Association of Southeast Asian Nations) represent most of the rest of expected LNG demand growth in Asia. Pakistan (green solid and dotted lines in Figure 2) has only one FSRU on IEA’s import/regasification project list (capacity, ~700 MMcf/d), but on December 15 (2016) Global Energy Infrastructure Ltd. (GEIL) signed a 20-year charter agreement for a second project: an FSRU (with Höegh, a leading FSRU supplier) that will be floated in to Port Oasim (near Karachi, Pakistan) and begin operation in the second quarter of 2018. GEIL already has contracted with Qatargas to provide 1.3 MTPA of LNG (equivalent to ~200 MMcf/d) to the FSRU for 20 years and is close to reaching final deals for another 3 MTPA (more than 400 MMcf/d). As for the ASEAN countries we mentioned, they have three projects (one each in Thailand, the Philippines, and Indonesia, which is planning an FSRU) totaling ~1.2 Bcf/d under construction, and Bangladesh (not an ASEAN member but in the neighborhood) is planning a ~500-MMcf/d FSRU.

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It would make sense—and it would seem likely—that incremental LNG demand the next few years would be driven largely by a combination of up-and-comers (China, India), recent market entrants (Pakistan, Jordan and Argentina, for example), and the next round of LNG buyers about to join the fray, many of them taking the faster/cheaper FSRU route. Figure 3 shows Cheniere’s latest view of where international LNG demand may be heading through 2030, grouped into three buyer categories: established players (grey bar segments), recent entrants (light blue bar segments), and those expected to start importing LNG within the next two or three years.

 

Figure 3; Source: Cheniere, November 2016 presentation

We can’t vouch for the numbers in Cheniere’s forecast (they understandably see a bright future for LNG), but even if their outlook proves to be a little optimistic, it’s easy to see how the ready availability of LNG (thanks to all the new U.S. and Australian capacity coming online) and the expectation of relatively low and stable LNG prices (thanks to all that supply and the heightened competition among LNG suppliers) could spur a lot of incremental demand for LNG by the early 2020s. 

That brings us to today’s final question: How quickly might rising demand for LNG chip away at the coming LNG capacity overhang? A full analysis would take an entire blog series, but the short answer is that the supply overhang may not be as large as many have feared, and that by the mid-2020s still more liquefaction/LNG export capacity may well be needed. According to IEA, while ~43 Bcf/d of liquefaction capacity exists in the world today, about one-seventh of that (~6.2 Bcf/) is currently “unavailable” for one reason or another—mostly due to lack of gas supply to the liquefaction plant, but also because of wars/security issues and operational problems. That leaves ~37 Bcf/d of liquefaction capacity in operation, with another ~14 Bcf/d to be added by new projects by 2020-21 (for a total of ~51 Bcf/d). Current LNG demand is about 34 Bcf/d, so you can see the big LNG capacity overhang that could occur if demand doesn’t rise quickly. If LNG demand were to rise to ~40 Bcf/d by 2020 and nearly 50 Bcf/d by 2025 (as Cheniere thinks it will; 1 MTPA equals about 7.8 Bcf/d), the capacity overhang would be largely eliminated within eight years––which as it turns out is about as long as it takes to plan and build new liquefaction/LNG export capacity from scratch. In other words, if you believe that relatively low LNG prices will be encouraging a lot of new LNG demand, the time to start developing the next wave of liquefaction/export projects is fast approaching.

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“Coming Up” was a hit single for both Paul McCartney (as a solo performer) and Paul McCartney & Wings in 1980. Sir Paul’s studio version of the song from his McCartney II solo album rose to #2 on the UK singles chart, while a live version of the song by Wings topped the Billboard Hot 100 in the U.S.

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