There will be strong demand for global liquefied natural gas (LNG) over the next 10-20 years, but increasingly, price-sensitive buyers will be less willing to pay a premium for supply security, consultancy Ernst & Young said in a new report.
According to the “Global LNG report — Will new demand and new supply mean new pricing,” if the LNG production capacity currently proposed were all built, global capacity would more than double by 2025.
“Even with reasonably strong demand growth, this implies growing supply-side competition and upward pressures on development costs and downward pressures on natural gas prices,” E&Y said. “Nevertheless, the very positive longer-term outlook for natural gas is driving investment decisions, both in terms of buyers’ willingness to sign long-term contracts and sellers’ willingness to commit capital to develop the needed projects.”
The LNG supply base has broadened over the last five decades, and there have been two waves of suppliers to emerge, E&Y said. Algeria, Malaysia and Indonesia dominated the first wave, while Qatar and Australia dominated the second. A third wave is on the way and could include up to 25 supplier countries, many of which today have little or no LNG production capacity, the firm said. By 2020, these countries could provide as much as 30% of the world’s LNG.
On the project development front, cost pressures are mounting, particularly in Australia, E&Y said. “Sanctioned projects are generally less significantly impacted, but projects still seeking contracted offtake are at substantial risk,” the firm said. “In contrast, brownfield projects, which include expansions to existing operations and those that will build on existing LNG import infrastructure, such as in the U.S., will have distinct cost advantages.”
Merchant LNG projects, which don’t include the costs of developing upstream gas supply, also are advantaged on the cost side, E&Y said. These include most of the proposed U.S. LNG export projects.
“But the supply-demand magnitudes and dynamics aside, the biggest potential impacts are on LNG pricing: namely, will oil-price linkages continue to dominate global LNG contract pricing; will there be room for spot-gas-price linkages; and will divergent regional gas prices show signs of convergence?” E&Y said.
The growth in the number of LNG supply sources is challenging the status quo, with Asian buyers presumably looking to modify or possibly replace their long-standing and relatively expensive pricing model of gas prices tied to oil prices. “High LNG development costs will require iron-clad long-term off-take agreements. However, more recently, the market is witnessing the inherent conflict of increasingly-more-expensive projects trying to sell to increasingly-more-price-sensitive buyers,” E&Y said.
The consultant said oil indexation of gas contracts will become more difficult with greater competition among sellers, more price-sensitive buyers, increasing energy deregulation, increasing gas-on-gas competition from new pipeline infrastructure, increasing spot market liquidity, and the increasing availability of spot price-based LNG exports. “In short, high-cost projects will find it harder to find shelter in bilateral contracts and high-cost sellers will struggle to preserve pricing power,” E&Y said.
In the United States and Western Canada, gas for LNG is likely to be priced on a spot basis, unlike elsewhere in the world. “Critically, the possibility of spot gas-linked contracts for North American LNG could upset the traditional LNG pricing structure,” E&Y said.
“The proposed North American LNG export projects are particularly well-positioned, even though the U.S. Gulf Coast projects will give up some of their free on board (FOB) cost advantage with higher shipping costs. As substantial volumes of lower-cost LNG move into Asian markets, projects at the high end of the supply curve — namely, many of the Australian projects — will become increasingly vulnerable.”
The firm predicted “a gradual but partial migration” from oil-linked pricing for global LNG to more spot- or hub-based pricing. “LNG sellers are reluctantly facing realities and are offering concessions in order to remain competitive,” E&Y said.
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