Moody's: U.S. Market to See Biggest LNG Growth Long Term
Asian demand will fuel liquefied natural gas (LNG) growth in this decade, but in the long run, the Atlantic basin, particularly the United States, will witness the greatest growth, according to a new Industry Outlook report by Moody's Investors Service.
Moody's analysts said the LNG industry is "poised to enter a period of accelerated expansion," boosted by a steadily increasing global demand for gas, high energy market prices and falling unit costs of LNG production and delivery.
The development of new industry models in response to the changing market is likely to result in greater variability in credit profiles, but the rating agency believes the LNG chain will generally remain an investment grade business risk.
"In terms of suppliers, we expect Qatar, which has ample low-cost gas reserves that viably allow it to supply each major market, to be the primary beneficiary of the LNG boom," says Chetan Modi, a Moody's senior analyst and author of the report.
In Moody's opinion, changing market requirements are resulting in a shift away from an industry in which until recently producers have only committed to build capacity once all output has been fully sold under long-term contracts to highly creditworthy customers and customers have focused primarily on security of supply.
"Different models are likely to develop for Asia, Europe and the U.S., with contractual terms reflecting buyer priorities in each market," says Modi. "Asian customers will retain a higher focus on security of supply, while U.S. customers will emphasize risk management given their liberalized competitive market. European developments will depend on the pace of liberalisation, although the UK model may be similar to that of the U.S."
Long-term contracts will remain a prominent feature, but the short-term market is becoming increasingly important, and price arbitrage opportunities already exist, Modi said. On balance, a global LNG bubble seems unlikely.
"Despite dramatically falling costs, the industry remains highly capital-intensive and producers continue to prioritize having a viable market for each train developed," Modi said. "Although counterparty credit risk has started to increase and end markets are becoming more liberalized, the LNG chain generally remains an investment grade business risk."
Price break-even levels will continue to be important credit drivers for any project taking commodity risk, according to the report. Regasification terminals may have the widest range of credit profiles, with the strongest being regulated assets or those tolled by highly creditworthy counterparties and the weakest being those that assume significant merchant risk.
"The integrity of the whole LNG chain remains a key consideration in the analysis of any single component, given the immature status of the short-term market and the consequent difficulty in relying on alternative use of assets for projects with non-recourse debt that must be serviced on a timely basis," said Modi.
For more information on the report, visit www.moodys.com.