Despite the current oversupply situation in the global gas market, industry leaders believe more investments in liquefied natural gas (LNG) export projects are needed in order to keep pace with demand by the middle of the next decade, although trends in pricing and project scale are likely to evolve beyond traditional norms.
In DNV GL’s 2019 Industry Outlook Survey, 43% of senior oil and gas professionals -- especially Asia Pacific responders -- said they believed demand for gas would exceed supply within five years. There was more optimism evident in the firm’s survey of LNG-focused oil and gas professionals, in which 57% believed global LNG supply would be able to meet China’s projected demand growth through 2025.
However, the same group was almost universally concerned about the infrastructure investment needed to satisfy expected demand beyond that point, as 85% believe several new LNG infrastructure projects would need to be initiated in 2019 to ensure supply can meet demand after 2025.
“We need more final investment decisions on new LNG projects globally to avoid having a very tight gas market when we get into the mid-2020s, even though the market right now is well supplied,” Equinor chief economist Eirik Wærness said.
NextDecade Corp. and Tellurian Inc. were among the U.S. LNG developers last week at the 19th International Conference & Exhibition on Liquefied Natural Gas in Shanghai that inked deals that move along their planned export projects. Final investment decisions on both projects are expected this year.
Meanwhile, LNG demand growth depends on the development of infrastructure, particularly facilities to regasify, store and distribute new liquefaction capacity. DNV GL’s LNG survey respondents believe the cost of financing new facilities would be the top infrastructure barrier to impact the global LNG market in 2019.
“Infrastructure development will be an issue in a number of emerging economies. The uncertainties are not necessarily only related to the timeline, but the extent of the infrastructure,” said DNV GL’s Hans Kristian Danielsen, vice president of marketing. “Uncertainties are largest in countries with little or no infrastructure in place already, and countries considered less stable.”
Indeed, China has set aggressive goals for building out its infrastructure, but other countries like India will also boost demand. India currently has four LNG receiving terminals, and plans to build 11 more over the next seven years, with the near-term goal of doubling the proportion of natural gas in its energy mix by 2022.
New LNG importers have emerged in recent years elsewhere in Asia, including Indonesia, Malaysia, Pakistan, Singapore and Thailand, while Bangladesh, Myanmar, the Philippines and Vietnam are expected to follow suit, according to DNV GL.
Even Australia -- the world’s biggest exporter of LNG -- is building import terminals to provide gas to its major cities in the south and east, as most of the country’s gas fields are off the northwest coast, far from the largest populations.
“Import terminals are quicker and cheaper to build than a pipeline network across the breadth of the country, so imported LNG will be important to Australia’s long-term gas price management and security of supply,” DNV GL researchers said.
As new LNG consumers emerge, demand from existing LNG consumers is also expected to increase. In Europe, for instance, LNG is expected to play an increasingly important role, especially as current global gas prices have sunk to levels that have priced out cargoes to Asia.
In Korea, the world’s third-largest importer of LNG, large LNG import contracts are scheduled to end in a few years, and the new government is driving greener energy policy and moving away from coal-fired power plants, according to Korea Gas Co.’s Young-Myung Yang, executive technical advisor. “Consequently, LNG players will give more attention to global conventional onshore LNG and floating LNG (FLNG) projects to meet increasing natural gas demand.”
Indeed, substantial growth is expected in the use of FLNG vessels to unlock stranded offshore gas assets, as such vessels can be used to load carriers directly without the need for costly pipeline infrastructure. Royal Dutch Shell plc’s large-scale Prelude FLNG facility has grabbed the headlines for its record-breaking size as the vessel is the largest ever made at more than 1,600 feet long.
Subsea wells were opened at an FLNG facility in the Browse Basin off the northwest coast of Western Australia in December, indicating start-up and ramp-up of the 3.6 million metric tons/year (mmty) facility. The FLNG is also expected to produce 1.3 metric tons/year of condensate and 0.4 metric tons/year of liquefied petroleum gas.
However, the future appears to belong to smaller-scale developments, as 59% of DNV GL survey responders said the industry will prefer smaller FLNG projects and tanker conversions over Prelude-sized units.
“Smaller vessels have many advantages. They are cheaper to build and operate, faster to deploy, and effective at exploiting smaller volumes of stranded gas and at serving the many markets looking to buy smaller volumes,” Danielsen said.
Italy’s Eni SpA Coral FLNG, one of the newest vessels to be purchased, reflects this trend. Construction began in 2018, and when it starts producing (from offshore Mozambique) in 2022, it is expected to produce 3.3 mmty compared to the 5.3 mmty expected from Prelude FLNG.
With so much infrastructure needed to meet global LNG demand over the coming years, seven in 10 senior oil and gas professionals believe price uncertainty is limiting investments in LNG mega-projects, according to DNV GL. Oil-indexed LNG pricing is part of the issue.
Recent oil price swings that sent Brent prices briefly above $70/bbl last week have made LNG sellers reluctant to peg decades-long contracts to volatile crude markets. That wasn’t the case for NextDecade’s Rio Grande LNG export project, however, as the first contract announced at that facility was largely tied to Brent pricing.
At the same time, sellers still need long-term commitments to make their infrastructure investments viable. In DNV GL’s survey, nearly half of the respondents (49%) expect contracted LNG prices to continue to be linked to oil prices, while a significant proportion (30%) disagree.
Cheniere Energy Inc.’s Oliver Tuckerman, vice president for commercial structuring, also noted last month that most LNG buyers still prefer to price their contract off oil despite abundant, cheap U.S. gas supplies. Nevertheless, the Houston developer has been successful in securing contracts tied to U.S. benchmark Henry Hub. Its latest, in December, was a 20-year 1.1 mmty deal with Petronas LNG Ltd. (PLL), a subsidiary of Malaysia’s state-owned Petroliam Nasional Berhad.
As an alternative to oil-indexation, long-term contracts could be linked to gas-hub prices or even consumer-price indices. However, a fundamental disconnect between LNG seller and buyer interests underlies the issue, according to DNV GL. “Sellers need long-term cash flow certainty to support major investments. Buyers, in contrast, need long-term flexibility to ensure consistently competitive prices, as well as the ability to adapt volumes and contract tenure to market changes.”
These needs are not completely compatible, as both sides cannot achieve their ideal terms simultaneously, DNV GL researchers said. Therefore, buyers and sellers must choose where to compromise, and work creatively on new contracting models that help mitigate risk on both sides.
Last week, Tokyo Gas Co. Ltd. said it clinched a heads of agreement (HOA) for LNG supply with a Shell unit that would use a unique pricing formula based on coal indexation. The agreement, said to be the first of its kind linking global gas supply to coal prices, is between one of Japan’s largest gas utilities and Shell Eastern Trading (Pte) Ltd.
The parties have been in joint discussions on the new type of agreement “that can contribute to creating LNG demand,” Tokyo Gas said. The 10-year contract is to begin in April 2020, with Shell supplying about 500,000 metric tons/year of gas.
New contractual terms are indeed emerging as the market diversifies, but more innovation is required in this regard, according to DNV GL. More than 70% of its survey respondents believe LNG buyers need more flexibility in LNG contracts to reduce volumes, shorten tenures and change delivery locations.
Along with new contractual arrangements, the involvement of new market actors could be key to bridging the divergent interests of LNG buyers and sellers, including LNG portfolio players. Such organizations supply LNG from a portfolio of LNG interests from various regions. They often also own or invest in shipping, storage, and regasification infrastructure.
“Portfolio players have an intermediary role between producers and consumers of LNG, and this helps maintain a floor for prices (suiting sellers), while adding market flexibility and liquidity (suiting buyers),” DNV GL researchers said.