There Will Be an Answer, L-N-G; New Export Supply from Down Under and the U.S.

Demand for liquefied natural gas has been flat recently, but liquefaction/LNG export capacity is on the rise. The resulting supply/demand imbalance along with the crash in crude oil prices has sent LNG prices to unexpectedly low levels, and raises questions about the competitiveness of all the new Australian and U.S. projects coming online in 2016-20. Today, we continue our examination of the fast-changing international market for LNG with a look at the new capacity being added to an already saturated LNG market, and how U.S. LNG exporters might fare in a hyper-competitive world.

This is Episode 3 in our series about recent developments in the international LNG market. The series’ aim is to describe the market’s changing supply/demand dynamics, and how they are likely to affect U.S. natural gas producers and LNG exporters in particular. In Episode 1, we recapped how the decisions to convert four U.S. LNG import terminals to liquefaction/LNG export terminals (and to build a greenfield liquefaction/export terminal in Corpus Christi, TX) were spurred by expectations that gas from the Marcellus, the Eagle Ford and other prolific shale plays would be so plentiful (and so inexpensive) that the U.S. could help meet a significant share of what was then seen as fast-growing worldwide LNG demand. We also laid out several factors that will help determine how U.S. players—gas producers, midstream companies and LNG exporters—will fare in the very different market (low oil and LNG prices, flat LNG demand, too much liquefaction capacity) that emerged instead. Then, in Episode 2, we delved into the LNG demand side of things, noting that in 2015, imports of LNG by Japan, South Korea and others inched up only 2% (one-third the pace once expected), to about 250 million metric tons per annum (MTPA), the equivalent of 32 Bcf/d of natural gas. We also explained why 2016 is likely to shape up as another flat year (weak demand in Japan, South Korea and China), and why—longer term at least—there’s reason to believe that LNG demand may rise more quickly (India, Europe and Latin America, to name three potential bright spots).

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This time we focus on liquefaction/export capacity—in other words, supply—and on how fierce the competition among suppliers is likely to get. The international LNG market is in the early stages of its biggest liquefaction-capacity build-out ever. According to one recent forecast (by BP, in their Energy Outlook report issued in mid-February), the equivalent of one new liquefaction “train” will begin operation every eight weeks (on average) for the next five years. That’s a lot of new LNG capacity/potential supply in a market already characterized by oversupply and spot prices at less than one-third what they were two years ago. Most of the new liquefaction capacity is being built in two countries--Australia and the U.S.—each blessed with vast natural resources and eager to market their surplus energy abroad. As you can see in Figure 1, the developers of liquefaction/export facilities in the Land of Oz got a head start on Final Investment Decisions (FIDs) for their projects (grey bar segments in 2007 and 2009-12); as a result, much of Australia’s new capacity will be coming online in 2016-17, though some has been delayed beyond that. This year alone, more than 25 MTPA of new Aussie capacity will be available; 9 MTPA already is, with the January (2016) startup of the Australian Pacific LNG project, a joint venture of ConocoPhillips and Origin Energy that liquefies coal-seam gas in Queensland. (Two other coal seam gas-to-LNG projects came online in Queensland in 2015.) Later this year, liquefaction and LNG exporting will begin at Chevron’s 15.6 MTPA Gorgon project (the world’s most expensive to date, with an estimated cost north of $50 billion).

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