Global liquefied natural gas (LNG) buyers clearly have the upper hand as even more supply is slated to enter a glutted market in the coming years. As smaller countries enter the LNG-consuming ranks, sellers will need to accommodate their particular needs while adapting to new demands from their traditional clientele.
The weak market for LNG is setting the industry up for "sort of a commodity-style investment cycle" that hasn't really been seen before in the industry, Poten & Partners' Jason Feer, head of business intelligence, said in Houston Wednesday. It used to be that supply was developed more or less in step with demand.
However financing for the export terminal buildout in the United States has been largely underpinned by LNG aggregators, which are parties purchasing LNG for resale to others. Add to their ranks the universe of LNG end-users that have overbought the commodity and now resell it into the market, and you have a lot of "homeless" LNG, Feer said at CWC's 14 th World LNG Series: Americas Summit & Exhibition.
"...[A] lot of those long-term contracts that allowed U.S. projects, in particular, to get built are with aggregators, and those companies, those traders really don't know where a lot of that LNG is going to go."
Traditional markets for LNG, such as Japan and Korea, have been showing flat to modest growth, Feer said. Prices will be "fairly soft for the short and medium term. The assumption that "an endless amount of LNG" can be absorbed by Europe, "...I think we have some real questions about that," Feer said.
In Europe and elsewhere, renewables are taking market share from natural gas.
"I've been in oil for 25 years and never had any time for renewables," Feer said. "I always thought it was a sort of nice, feel-good kind of story that would never really amount to much of anything. But what we're seeing is unsubsidized solar is competing in the Middle East, in India and South America. And renewables, I think, are really going to compete head-to-head with LNG going forward, particularly in Europe, particularly in places where you impose high carbon costs."
Emerging Asian consumers of LNG, such as China and India, are also growing more slowly than previously expected. There is more price sensitivity among Asian consumers. "Traditionally, people have viewed LNG as not very elastic," Feer said. "I think we may see more elasticity coming into the market as we see prices staying low for a period of time."
Traditional major LNG consumers, such as Japan, have been calling for a while now for more contract flexibility beyond the traditional 20-year agreements. "What they're looking for is a much more diverse portfolio with short-term contracts, medium-, long-term contracts, a variety of pricing, much more flexibility built into those contracts," Feer said. "What that means for U.S. producers is the pull on LNG from the U.S. is going to be a lot more variable, particularly if you have price-sensitive buyers participating in the market."
This is evidenced by the recent contract announcement made by Japan's Toho Gas (see Daily GPI, June 9). Cargos are to be delivered ex-ship, with the seller arranging transport. However, Toho said destination flexibility is allowed for by prior agreement between the parties. "We...strive for LNG procurement diversification, including diversification of the price-index, supply sources and types of contracts to ensure a stable energy supply to customers at a competitive price," Toho said.
Earlier this year Japan-based JERA Co. Inc. President Yuji Kakimi, said the global LNG sector should expect to see new buying and pricing trends emerging as the industry moves to one of greater supply volumes and greater choice in sourcing (see Daily GPI, March 1). More recently, JERA announced a contract to offload unneeded LNG to EDF Trading Ltd. beginning in 2018 (see Daily GPI, May 27).
One of the more positive things on the horizon for LNG sellers is the emergence of new, smaller LNG buyers, such as the Philippines, West Africa, Thailand, Pakistan and Bangladesh.
"That's real opportunity for U.S. projects and other projects," Feer said. "I think there's risks there that people are going to have to learn to contend with. A lot of these countries are less creditworthy, for example. When you're offering cargoes or trying to do business, a lot of what some of these countries are looking for is credit support, different terms in terms of payment, more flexibility in terms of volumes. And that's something different than a lot of suppliers are used to dealing with."
Oversupply, low prices, new contract and other demands from buyers and the role of aggregators all will make for a choppy market in the years ahead. "I think we're going to see a more LNG trading, short term, medium term, seasonal trading," Feer said. The near-term outlook for U.S. liquefaction/export projects is not good.
Poten doesn't see 90% capacity utilization at U.S. terminals until about 2023, and Feer said even that might be bullish on demand. "There's an awful lot of capacity in the U.S. that we think may not run.
"We do expect demand to grow; the surplus will be absorbed. In the end it will all be all right. But I think we're in for a bumpy ride the next few years."