Too Much, Too Little, Too Late - Competition, Low Prices Unsettling the LNG Market

The international market for liquefied natural gas (LNG) is in the midst of a wrenching transition. The old order, founded largely on long-term, oil-indexed contracts that called for certain volumes of LNG to be delivered by specified Point A to specified Point B, is being replaced by a new order characterized by intense competition among suppliers, new sources of supply (and demand), a glut of liquefaction capacity expected to last at least a few years, more spot purchases, and contracts incorporating destination flexibility—and, for many, tied to natural gas (not oil) prices. Today, we continue our exploration of the industry’s fast-changing dynamics with a look at the fierce battle now under way among LNG suppliers for market share, and at new approaches to pricing LNG.

As we said in Episode 1, only eight years ago U.S. natural gas prices were spiking, domestic gas production was declining, and much of the market was anticipating a boom in LNG imports to the U.S. from Qatar and other major suppliers. Now, pipelines are being reversed to bring gas from the Marcellus and Utica basins to Gulf Coast to be super-cooled into LNG, and LNG from the first liquefaction/LNG export facility in the Lower 48 (Train 1 at Cheniere Energy’s Sabine Pass in southwestern Louisiana) is being shipped to overseas buyers. (Train 2 at Sabine Pass is in the process of being started up.) But the market expectations on which the development of new liquefaction capacity at Sabine Pass, Cameron LNG, Corpus Christi LNG (another Cheniere project), Freeport LNG, and Dominion’s Cove Point were founded have been shaken to their core. Recent spot prices for LNG (around $5/MMBtu—75% lower than where prices stood two and a half years ago) suggest that the world is awash in LNG. Worse yet, it is possible (but by no means certain) that during the 2016-20 period worldwide liquefaction capacity (for super-cooling/condensing natural gas into very transportable LNG) will rise to 448 million tons per annum (MTPA) from the 308 MTPA online at year-end 2015, a 45% increase in less than five years.

Of the 140 MTPA in liquefaction capacity that has been or is planned for the 2016-20 period, 62 MTPA is in the U.S., and most of the rest (50 MTPA) is in Australia. LNG demand in 2015 totaled 245 MTPA (the equivalent of about 31 Bcf/d of natural gas; 1 Bcf/d equals 7.82 MTPA), which means the capacity factor for the 308 MTPA of liquefaction plants in place as of last year (that is, the portion of the plants’ total capacity that was actually utilized) was about 80%. Even the more optimistic forecasts for the second half of the 2010s have LNG demand growing no more than 5% to 7%/year. A 5%/year pace (which, again, many think may be pie-in-the-sky, particularly in a post-Brexit world) would put 2020 LNG demand at about 313 MTPA; and with 448 MTPA of liquefaction capacity possible to be in operation that year, the 2020 capacity factor would be only 70%. In other words, even if we assume LNG demand growth is strong the next five years, there would still be a lot of “surplus” liquefaction capacity left for the market to absorb when the 2020s begin, assuming all that capacity is finished and comes online.

In Episode 1 we discussed the flood of new liquefaction capacity and the fact that increases in LNG demand have been much slower than expected when the commitments to build all that capacity were being made. (Worldwide demand for LNG increased by only 1% in 2014 and only 2.5% in 2015.) Today, we look at the increasingly fierce battle between incumbent LNG (and gas) suppliers and new entrants for market share, and at changes in how LNG is priced and traded.

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