Unchained LNG - Why More Liquefaction Capacity May Be Needed By the Mid-2020s

Last year was the best for global LNG demand growth since 2011, and a combination of ample LNG supply, new buyers and relatively low prices suggest that demand will continue rising at a healthy clip in 2017. That’s good news not only for LNG suppliers, but for natural gas producers and for developers planning the “second wave” of U.S. liquefaction/LNG export projects. Before those projects can advance, the world’s current—and still-growing—glut of LNG needs to be whittled down, and nothing whittles a supply glut like booming demand. Today we discuss ongoing changes in the LNG market and how they may well work to the advantage of U.S. gas producers and developers.

It’s easy to get caught up in the fact that way too much liquefaction/LNG export capacity is being added in the 2016-20 period, most of it in Australia and the U.S. Sure, it’s a bummer that liquefaction-plant developers, responding to fast-rising demand and high LNG prices early in this decade, started building an army of new facilities to supercool natural gas into LNG, only to see LNG demand growth stall and prices plummet in 2014-15, just as the first of their new plants were nearing completion and about to come online. As we said in Coming Up, though, markets do respond when supply and demand get out of whack. Spot prices for LNG for a time fell below $5/MMbtu, and the price of LNG purchased under long-term contracts (many of which index the LNG price to the price of crude oil) declined as well (though not nearly as far). In response––and with the knowledge that a slew of new Australian and U.S. liquefaction capacity would be coming online over the next few years––global demand for LNG started rebounding.

In 2016, total demand for LNG increased by nearly 7%, from 248 million metric tons per annum (MTPA) in 2015 to 265 MTPA last year. (Over a year, one MTPA of LNG is equivalent to ~130 million cubic feet per day of gas, or MMcf/d; another way to look at it is 1 Bcf/d of gas equals ~7.6 MTPA.) Most of the growth in demand came from two categories of buyers: 1) existing LNG-consuming countries that either added new LNG-receiving and regasification capacity or made fuller use of the capacity they already had, and 2) countries that in 2015-16 became able to receive and regasify LNG for the first time. Figure 1 shows LNG demand growth (and, in a few cases, demand declines) by country in 2016, and separates new entrants (red bars) from countries that already had been importing LNG pre-2015 (yellow bars).

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