The global liquefied natural gas (LNG) market is supply constrained, but that will change in the coming years as new liquefaction capacity comes online, including in North America, allowing LNG consumption growth to resume, Poten & Partners Inc.’s Darryl Houghton told a Houston audience recently.
In fact, Poten, manager of the firm’s LNG consulting business, said at Platts’ 12th annual Liquefied Natural Gas conference in Houston, “East Africa and North America will be by far the most important new supplies that satisfy global and Asian LNG demand.
“There will be others, but North America from both the U.S. and Western Canada will capture around about 30 million tonnes of new LNG market by 2025.”
How much market North America captures relative to East Africa remains to be seen and will be determined by project economics and the preferences of LNG buyers, for instance, whether they want a contract linked to oil or a natural gas hub, he said.
In 2011, the global LNG market amounted to about 240 million tonnes per annum, and it was down a little bit last year. However, it is “…going to grow very fast over the next 10-15 years, and in our view probably quite a bit longer,” Houghton said. “It should reach somewhere around 400 million tonnes by 2025, which is way up from today’s 240 million tonnes.”
A trio of global liquefaction projects slated to have come on line are now running one to two years late, he said, representing about 15 million tonnes that “has been sucked out of the market…No wonder the market is tight today.” With European demand for LNG in the doldrums, supply is flowing from the Atlantic to the Pacific basin to satisfy demand growth in Asia.
Between now and 2015 the market is going to stay pretty much flat, he said. “Nothing else in the world can change because there is no new supply that shouldn’t have already started up between now and around 2015.”
Another factor affecting the current market is that a number of LNG liquefaction projects aren’t operating at their nameplate capacities. “…[I]f you look at what was actually produced in 2012 versus the nameplate capacity of all the plants in the world, there was only a production rate that’s about 81% of nameplate capacity,” he said. “Not only have some projects not turned up in 2012 and 2013, many of the existing projects aren’t producing to their level of planned capacity.”
Gas shortages are to blame in the countries of the two worst-performing plants: Egypt and Algeria. Gas is being directed to the domestic market rather than liquefied for export. Plants in Yemen and Oman were running at about 75% of capacity last year, he said. And other projects are struggling with gas supply, too.
But from 2016 to 2025, growth will return to the LNG market as new supply becomes available, Houghton said. “The biggest factor by far that’s going to impact on LNG after 2015 is going to be new supply coming from Australia. Between 2015 and 2025, Australia’s LNG production will grow from the mid 20s to around 90 million tonnes.”
That new supply will mean that Asian LNG demand will be satisfied by supply from within the Asian region.
“Asian LNG demand is the engine for global LNG growth,” Houghton said. “In Asia growth will go out to about 280 million tonnes from a much lower number today. The real center for attention for growth in the Asian region is going to be China and India. Yes, there’s growth in traditional markets in Japan, Korea and Taiwan. And yes, there’s also growth in new markets, Malaysia and Singapore and Thailand and Indonesia. China is growing fast economically and it will drag gas and LNG along with it.”
While China’s coalbed methane production industry is as sophisticated as any, the same cannot be said for shale gas in China, which will not make its impact felt on the market until after 2025, Houghton said. India also is important to demand growth in the Asia region. Domestic production there has run into disappointments, and the region is challenging to pipeline infrastructure.
In the Atlantic Basin, demand growth in Europe will be quite limited compared to that in Asia. “It’s really now very much an Asia-centered world in the LNG business. Success and failure will focus on Asia,” Houghton said. On the supply side of the ledger, three regions have emerged that were not given much consideration only three or four years ago. One of them is North America, which “will become one of the key producing regions of LNG over the next decade or so.”
The second most important of the three is East Africa where a joint venture of Anadarko Petroleum and Eni has discovered at least 100 Tcf of gas, “and that will become an important source of LNG before 2020,” Houghton said. “A smaller but also potentially important producing region can emerge in the eastern Mediterranean; both Israel and Cyprus have had very nice discoveries offshore in the last year or two.
“…[B]etween now and 2019, the world is tight in LNG. By the time we get to 2019, there will be significant production from North America. There will be production from East Africa and some of the other competing projects will start to turn up. We think that somewhere around 2019 the tightness in the world will start to loosen up.”
LNG demand will continue to grow around 2020 and after; however, supply will grow faster, and the balance will tilt back in favor of supply. “If supply is going to grow significantly faster than demand, that must have a downward impact on prices, and therefore we do see that the major implication in this switching of status between supply and demand will be lower Asian LNG prices by the time we get into the next decade,” he said.
In a recent note, analysts at Goldman Sachs wrote that if liquefaction projects currently under construction are completed, LNG spot markets will transition from 2015 into a bearish cycle following startup of new capacity. Excess supply will develop in the market during 2016-2017, they said. “We expect the global LNG market to subsequently move towards another bullish cycle from 2020 as demand growth rebalances the market.”
Meanwhile, a Wood Mackenzie analyst wrote last week that he figures the star of the Asian market to be Southeast Asia.
LNG suppliers targeting Asia should look more closely at Indonesia, Thailand, Malaysia and Singapore as LNG demand is growing in these countries, Wood Mackenzie said. The combined Southeast Asian LNG markets will account for one-third of overall Asian LNG demand growth by 2025, growing by 45 million tonnes per annum (mmtpa). However, the rate of India’s LNG market growth may not be as sizeable as once thought, growing by 20 mmtpa within this timeframe.
“Recent developments in Indonesia and Thailand have helped strengthen the outlook for very strong Southeast Asian LNG demand growth,” said Wood Mackenzie’s Nicholas Brown, senior gas market analyst. “In India, we are now seeing faltering domestic gas production, and this is expected to limit the development of the gas market. Perhaps counter-intuitively to some, reduced gas production will also lower the rate of LNG market growth in India. Indonesia will increasingly require LNG as we expect domestic demand to outpace domestic supply. Early coalbed methane pilot well results in South Sumatra indicate that production will not meet previous expectations, providing more headroom for LNG.”
As for Thailand, Wood Mackenzie expects a trend of higher gas demand due to policy decisions in the power sector resulting in an increasing reliance on gas-fired plants. This will drive LNG demand significantly post-2020 as indigenous gas and pipeline imports will be unable to meet demand, the firm said.
In India, production from Reliance’s D6 block has fallen from a peak of 20 billion cubic meters (Bcm) in 2010 to 11 Bcm in 2012. Wood Mackenzie forecasts production from D6 to continue falling, reducing the overall outlook for Indian gas production. “This will constrain gas availability to the market, mainly impacting the power sector in the medium term,” Brown said. “In the longer term, reduced production will preclude the development of greenfield fertilizer production as it is not economical to develop facilities purely based on LNG imports. In addition, LNG demand growth in other industrial sectors is further limited by reduced economic growth expectations.”
Asian demand growth overall will remain robust, though, as Southeast Asia will more than offset slower growth in India, Brown said. Furthermore, LNG demand expectations for Asia have strengthened in recent years due to the reduced long-term reliance on nuclear power in Japan and Taiwan; as well as an increased role for LNG in China’s coastal provinces, the firm said.
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