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This LNG Glut Likely Deeper, Longer Than Last, Says Wood Mackenzie Analyst

The global liquefied natural gas (LNG) market is experiencing another period of oversupply, with significant downward pressure on prices in Asian and European markets. How low will prices go is the key question for the industry, said Wood Mackenzie's Noel Tomnay, head of global gas and LNG research.

In a report he prepared for the Gastech 2015 conference in Singapore this week, Tomnay recalled the last era of LNG oversupply from 2008 to 2010. That happened when Qatar ramped up output and the market had to absorb an additional 50 million tonnes per annum (mmtpa) of LNG at a time when demand had slowed.

"As a result, gas spot prices in Europe traded under US$4/MMBtu through the summer of 2009 and with no market in Asia, those prices were still enough to attract LNG cargoes to Europe, including from Australia," Tomnay said.

"The LNG market is facing another oversupply which is likely to be deeper and will persist for some years. Prices in Asia will be lower than in Europe, and at their lowest, between 2017-2019, while prices in Europe will not reach a low point until 2020. The key question the industry is wrestling with is: how low will prices go?"

According to the consultancy, 130 mmtpa of additional LNG supply is set to reach the market over the next five years. And this will happen as demand in China falters. Wood Mackenzie said China's market policies will be key to how the situation plays out.

China could take more LNG under "more liberalized market conditions," Tomnay said. This would help mitigate the oversupply's pressure on prices. Measures in China that could help include improved regasification infrastructure access, reductions in regulated gas prices and allowing the curtailment of high cost indigenous gas. "It is likely that output from some high cost gas will be curtailed but protectionist measures will restrict China's willingness to fully replace indigenous gas with lower priced LNG, dampening the potential supply response," he said.

LNG demand in China could grow on the displacement of coal for power generation, Tomnay said. The natural gas price at which coal will be displaced -- a soft floor for gas prices -- will be determined, in part, by the price of coal. "Assuming higher ARA [Amsterdam Rotterdam Antwerp] coal prices in Europe of US$70/tonne and Japanese coal prices of US$80/tonne CFR [cost and freight], a floor price for gas in Europe and Asia should be maintained at prices above US$5.00/MMBtu," he said. "This should be sufficiently high to avoid US LNG being shut in."

But lower coal prices, perhaps caused by coal's displacement by natural gas, could pull both gas and coal prices down further, according to the firm. "At prevailing ARA coal prices of US$50/tonne and Japanese coal prices of US$60/tonne CFR, a floor price for gas in Europe and Asia could go down to prices at which many US LNG exports fail to cover cash costs, around US$4/MMBtu. This would force U.S. LNG exporters to consider shutting in for periods, a move which would depress U.S. gas prices."

European natural gas prices also are subject to the actions of Russia and other major suppliers. They could pull gas from the market, which would lend support to LNG spot prices. "It was Gazprom's withdrawal of 20 billion cubic meters per annum of pipe gas from Europe between 2008-2010, equivalent to 15 mmtpa of LNG, that prevented spot prices from remaining low," Tomnay said. "At periods of severe oversupply, Russian gas supply behavior will again be key to gas price formation in Europe -- and this time in Asia and even the U.S. too."

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