Expected LNG surplus evaporates, scramble for new projects looms

ADELAIDE (Reuters): Liquefied natural gas (LNG) producers around the globe are once again considering new investments as expectations of a glut in supply wither away in the face of strong, China-led demand growth in Asia.

Given it takes several years to go from a Final Investment Decision (FID) to producing cargoes of the super-chilled fuel, however, the industry may be acting too late to prevent a supply shortfall by the middle of next decade.

Much of the focus this week at an annual oil and gas conference in Australia - which is about to become the world’s top exporter of LNG – was on what projects are viable and how quickly can they be developed.

This was in stark contrast to the mood at previous events hosted by the Australian Petroleum Production and Exploration Association (APPEA), where executives had talked mainly about how to cut costs and the strategies needed to survive the predicted surplus of the fuel. The forecasts for a global glut were based on the market being swamped by eight new Australian LNG projects, plus at least four in the United States, as well a handful of others in frontier countries such as Mozambique.

But the narrative of industry over-investment in capacity has been turned on its head by the spectacular growth of Chinese demand, which leapt 46 percent last year to 38.1 million tonnes.

China is now the world’s second-biggest LNG buyer, behind Japan, and its demand has continued to grow rapidly, with first-quarter imports up 59 percent from a year ago to 12.4 million tonnes. China’s policy to replace coal with natural gas for uses such as residential heating and some industries is expected to continue to drive growth in LNG imports, although some moderation in the rate is likely in coming years.

But other Asian countries are also stepping up LNG imports, including new buyers such as Bangladesh, Pakistan and Sri Lanka.

Disappearing surplus

At the height of the LNG construction boom of the past decade, forecasts of a surplus of as much as 50 million tonnes per annum around the start of the 2020s were not uncommon.

While a surplus is still expected by most analysts, size estimates have been shrinking, and if China continues to grow demand at anything like its current pace, the surplus will likely disappear altogether.

Wood Mackenzie analysts Saul Kavonic and Nicholas Browne, speaking on Tuesday on the sidelines of the APPEA conference, said the surplus was likely to be as little as 10 million tonnes in the early years of the 2020s.

In a total market of more than 350 million tonnes a year, such a small surplus really amounts to a market that is more or less in balance.

Kavonic and Browne also said that by 2025 the market was likely to switch to an annual deficit of about 50 million tonnes, and there simply aren’t enough projects being approved to meet the potential supply gap.

In 2017, just one LNG project reached FID, that being the relatively small Coral floating LNG development in Mozambique.

There is also a dearth of shovel-ready projects that can be approved and developed in time for 2025, with the best prospects in the United States, Canada and East Africa.

In Australia, the likelihood of a new greenfield development is slim, given the massive capital costs of developing increasingly remote fields.

There is instead the possibility of expanding existing operations, with the likely best bet being Woodside Petroleum’s plan to use the Scarborough field off the Western Australian coast to feed a new train at its Pluto LNG plant.

For the rest of Australia, the industry seems to be concentrating on developing new fields to replace ones that are depleting, thus allowing the existing 80 million tonnes of capacity to continue operating.

The evaporation of the expected LNG surplus may also have implications for pricing and contracting in the industry.

LNG buyers have led the charge in recent years to end long-term, restrictive contracts linked to crude oil prices in favour of shorter-term or even spot deals with prices linked to LNG indexes or other natural gas prices, such as the US benchmark Henry Hub.

The buyers did this because they believed the balance of market power was shifting in their favour. They may now find resurgent producers kicking them back and demanding higher prices in order to guarantee supplies.