Global liquefied natural gas (LNG) buyers are committing to long-term contracts more than ever, amid signs of a tightening market in what one analyst predicted could create a major gas shortage after 2022.
This year proved to be a good one for gas exporters, as Asian demand overall remained strong. The market is poised to continue to grow, centered around flexible and growing U.S. LNG volumes over the next two years. However, global demand appears to be rising even faster, according to Rystad Energy.
That indicates a “heightened risk of an emerging deficit of LNG supplies post 2022,” said Rystad Energy senior analyst Sindre Knutsson.
By the end of November, contract volumes of long-term (LT) sales and purchase agreements (SPA) were up by 38% year/year, according to Rystad. Three quarters of the volumes were signed after Aug. 1, “signaling expectations of a tighter market among buyers.”
The duration of contracts on average also has increased, which may be a sign buyers are less confident that can secure enough supply from the spot market. That’s a reversal from the trend seen in recent years.
“We expect LNG buyers to continue to seek flexible contracts, but that the large established Asian buyers -- such as Japan, South Korea, Taiwan and China -- will continue to rely on long-term contracts to ensure security of supply,” Knutsson said.
The increased activity in committing to LT contracts should help advance final investment decisions (FID) and secure financing for LNG projects.
However, these new projects “need to be firmed up very soon in order to avoid a shortfall,” Knutsson said. “Assuming even a four-year construction period from investment decision, the market could tighten significantly from 2023.”
Rystad still expects to see excess LNG volumes over the next three years, driven by U.S. newbuilds and expansions now underway along the Gulf Coast. As many as five U.S. projects are expected to reach FID in 2019: Sabine Pass Train 6 in Louisiana, Golden Pass in Sabine Pass, TX, Calcasieu Pass in Cameron Parish, LA, Freeport Train 4 on the upper Texas coast and Driftwood LNG in Louisiana.
“Less than one-third of the current U.S. wave of supply has started up, leaving the lion’s share of new LNG production to flood the market over the next two years,” analysts said. “This could turn around quite rapidly in 2022, as LNG demand growth outpaces sanctioned supply.”
Despite negative headwinds from Chinese tariffs on U.S. LNG exports this year, the upcycle is definitely underway, with a “plethora of positive anecdotes” this year, according to the Evercore ISI team.
“Even with the headline risk, our views on the global LNG upcycle remain undeterred amid FIDs for LNG terminals, increasing natural gas supply, and continued demand growth from the Asia Pacific region,” Evercore analysts said.
Since 2013, the United States and Australia have led the world on liquefaction capacity, bringing online an estimated 9.67 Bcf/d. The Energy Information Administration expects 5.7 Bcf/d to be added in 2019 from the United States alone.
“We also find comfort in the fact that there is a considerable opportunity set internationally,” with facilities planned in Mozambique, Qatar and Papua New Guinea (Train 3), expected to receive FIDs into 2019. One FID was issued on Friday by BP plc and its partners for Phase 1 of the innovative cross-border Greater Tortue Ahmeyim LNG development, which would be Africa’s deepest offshore gas project.
If all the projects reach FID, it “could eventually bring an additional 6.2 Bcf/d online,” according to Evercore.
The potential revenue from the LNG terminal build-out is expected to be substantial, especially for oilfield services companies, which provide facilities, modules, storage and liquefaction plants used throughout the process.
As many as 11 global LNG terminals are up for FID between 4Q2018 and 4Q2019, representing estimated project costs of $129.6 billion over four-five years and up to 18 Bcf/d in liquefaction capacity. The estimates don’t include possible FIDs which could bring the total balance to $336 billion.
Asian demand, the biggest market, hasn’t been as high of late as expected, however.
Energy Aspects said November customs and agency data for northeastern Asian buyers “is confirming what we expected -- healthy northeast Asian LNG imports but weak underlying gas demand.”
South Korea’s Korea Gas Co., i.e. Kogas, one of the world’s biggest buyers, in November reported a year/year drop in gas consumption but imports still were up 22%.
“The implication going forward is that Korean buying of additional LNG cargoes for delivery in December and January will be light,” Energy Aspects analysts said. “That could start to change, however, as northeast Asian balances have firmed a little as temperatures have fallen below normal in the past week and are set to be no higher than the seasonal norm over the remainder of December.”
There also is long-term demand showing up in the market, according to Energy Aspects. Kogas was reported to have issued a tender for a 15-20 year, 1.2-2.0 million metric ton/year SPA that would begin in 2025.
“Given the very large number of supply projects looking for long-term buyers, competition for that tender is likely to be immense,” analysts said. “Kogas already has some long-term new supply set to arrive from LNG Canada, when that project starts up in 2024-2025, but a number of its existing contracts are coming to an end.”