LNG MARKET: PATH OF THE GROWTH
Long-term growth of the global gas market on the way to the top of the global energy balance. The development of technologies related to the production, transportation and use of LNG will play an important role in this process.
In 2010-2018, LNG production in the world grew by 44% from 222 to 320 million tons. CAGR in this decade was 4.6%, while over the past three years the market has grown by an average of 8.9% annually, adding over 72 million tons since 2015.
Large-scale LNG Market Growth, MTPA
The Middle East became the main LNG production region at the beginning of the decade due to commissioning plants in Qatar and Yemen, bringing the export of liquefied gas close to 100 million tons per year. But in 2015 the Asia-Pacific region regained its traditional leadership by launching new capacities in Australia, Papua New Guinea and Malaysia. In addition, geopolitical instability led first to interruptions, and then to a full stop of the Yemen LNG project ending up period of the Middle East LNG production dominance.
At the same time, it should be noted the club of large-scale LNG producers still obtains the elite status. Since 2010, only two countries have replenished it – Papua New Guinea and Cameroon, while one of the oldest LNG plants Marsa El Brega was decommissioned, depriving Libya of being a liquefied gas producer and exporter.
LNG industry is developing cyclically. Periods of a massive commissioning of new liquefaction capacities are followed by years of relative lull with single LNG plant launches.
Existing, Under Construction, and FEED Completed LNG Capacities, MTPA
Worldwide LNG production capacity had been established at less than 150 million tons per year in 2005. By the end of 2010, additional 124 million tons per year liquefaction trains were put in. The next five years were very poor for new launches in the LNG industry – only 32 million tons of additional liquefaction capacity (including decommissioned trains). Most of them were built in Australia as part of the so-called “Australian wave”. The second half of the decade will be much more generous. Already, 75 million tons of capacity have been commissioned, mainly in Australia, the USA and Russia, and more than 70 million tons of plants are already under construction and are expected to be operational by December 2020. About 150 million tons of new capacity for the current 5-year period in total.
The start of the next decade again promises to be low-yielding for new LNG facilities. There are 20 million tons of under construction capacity only with a planned commissioning period of 2021-2025. However, 47 projects with a total capacity of more than 160 million tons per year have already completed FEED. Most of them are scheduled for commissioning until the end of 2025, but highly likely, the majority will either be postponed to a later date or partly even canceled. However, world’s large-scale liquefaction capacity will pass at least 550 MTPA in the middle of the next decade giving additional LNG production facilities of 100 million tons (during 2021-2025). Quite good result for relatively poor spending period.
Change of the LNG market model: from the traditional “supplier-long-term contract-buyer” with fixed destination to “portfolio seller - portfolio buyer” with geographically flexible deliveries.
Despite seemed “natural” flexibility of LNG supplies compared with pipeline gas trade, historically, large-scale liquefaction and regasification business has been very tough. Most of the contracts were concluded on the terms of a fixed destination, and gas carriers themselves cruised all the same route on a strictly agreed schedule.
LNG Supply Contracts with Deliveries in 2018 by Flexibility, %
Sales of LNG by Supply Contracts with Deliveries in 2018 by Type of Transportation, MT
Over the past years, the situation has gradually transformed and only 52% of the contracted volumes for which physical shipments of LNG from production trains were made in 2018, proved to be fixed by destination. Other 48% assumed to be flexible for delivering liquefied gas cargoes to any country or port. From the point of view of the physical volume of gas supplies, according to preliminary calculations, a little higher figure – 58% – still had come from the fixed deliveries.
Full amount of current long- and medium-term LNG supply contracts from the producing facilities existing in 2018 was 372 MT (physical volumes of LNG production in the world were about 14% lower). About 215 million tons were intended for final consumers under fixed contracts, including 80% to the Asian market and the rest was designated for the European markets. Another 128 million tons of annual deliveries were bought by international traders mainly of European and American origin (but also purchase contracts of Gazprom, Novatek and Petronas were added to this group). The remaining 28 million tons per year were the volumes contracted by Asian importers and traders on flexible terms.
Sold LNG Volumes under LT and MT Contracts in 2018 by type of Buyer, MT
*including exporters like Russian Gazprom, Novatek and Malaysian Petronas
New projects in Australia (28 million tons per year or 44% of its own contract base), the US (22 million tons or 100% of the contract base), Trinidad and Tobago (16 million tons or 100% of the contract base), Nigeria (13 million tons or 67% of the contract base), and also Russia mainly due to the launch of Yamal LNG (14 million tons or 57% of the contract base) had emerged as the largest suppliers of geographical flexibility for LNG trade. Qatar, the largest LNG exporter in the world in past years (as it is going to be replaced by Australia in 2019-2020), formally has the most extensive portfolio of flexible contracts, about 57 million tons per year, but most of them relate to the original contracts signed with ExxonMobil (31.2 million tons per year), ConocoPhillips and Shell (at 7.8 million tons per year each) for deliveries to the US market. Subsequently, best part of these volumes was resold by Qatargas to buyers in Asia and other market players within fixed supply contracts, and the majors received only a small amount at their disposal (in 2018, about 20% of the contracted volume).
Contracted* LNG Volumes by Flexibility and Country of Origin, MPTA
*contracts with deliveries in 2018
The trend to increase the share of contracts without reference to a specific point or even the country of destination is increasing. Less than 17 million tons (13%) have a fixed delivery port in the set of already signed contracts, deliveries under which should begin after 2018, and almost 109 million tons per year are sold on terms of flexibility.
In addition, contracts with a fixed destination of 70 million tons per year will expire by the end of 2025. Most of these obligations will be extended with the cancellation of the destination clause. Thus, the share of flexible agreements by the middle of the next decade may exceed 75%.
Volume of Contracts with Deliveries Starting after 2018, MPTA
LNG consumption appears to remain mainly Asian story with ¾ of global market
Unlike LNG production, where capacities are developing in different regions of the world, and the palm moves from region to region, consumption is concentrated in Asia with growing share.
LNG Imports by Region, MTPA
About 60% of global liquefied gas imports accounted for Asian consumers in 2010, at the time of the highest turbulence in the market and redirecting large volumes of LNG to Europe from the newly launched Qatar plants, initially aimed at the American market. Since then, Asia’s share in LNG procurement has steadily increased. In 2018, it got close to 76% net of re-exports, absorbing the entire volume of global supply growth and pulling back most of the volumes that were abandoned by consumers in the Middle East, primarily by Egypt and Dubai. Europe’s share in 2018 was 16% only. And the remaining regional markets imported just about 8% on all.
It is not surprising that the top 5 largest importers emerged in Asia. And they accounted for 70% of global LNG turnover in 2018. Japan is the leader in the consumption of liquefied gas, but in recent years China has become the growth driver, having increased LNG purchases 2.8 times to about 55 million tons since 2015 and got the second place in the range, despite strong growth in demand in Korea during the same period.
Top-5 LNG importers in the world, MTPA
To meet the Asian demand for LNG, liquefaction capacities are operating around the world. In 2010, 11 million tons were shipped from the Atlantic basin to the Pacific, and 51 million tons remained in the basin of production. At the end of 2018, the LNG flow from the Atlantic to the Pacific grew almost 3 times to 32 million tons, while within the basin supplies decreased to 47 MT. In addition, 6 million tons from the Atlantic went to the Middle East. Middle Eastern LNG exporters, which in 2010 supplied the Atlantic basin (mainly European countries) with 31 million tons, reduced this volume to 18 million tons by 2018, while the supply to Pacific consumers (including Pakistan and India) went up by 66% from 44 to 73 million tons.
Significant free LNG receiving and regasification capacity worldwide.
The LNG importers’ club is expanding actively. Some traditional exporters acquire LNG terminals to supply areas remote from production fields. Since 2010, 18 new countries, including Russia, have built and launched LNG receiving and regasification terminals. And the total capacity reached more than 820 MTPA by the beginning of 2019. Since 2005, capacity has increased 2.2 times. By 2020, it is planned to commission capacity of another 71 million tons per year, and approximately the 50 MT is being built with the expected commissioning in the first years of the next decade.
Large-Scale Regasification Capacity in the World (existing and under construction), MTPA
The floating storage and regasification units (FSRU) construction industry is developing intensively, that increases the speed of project implementation, reduces costs and opens up opportunities for increasing the flexibility of the entire supply chain, as such terminals can be used to transport LNG and transfer to new regions if the importer ceases need this facility to import liquefied gas due to changes in the energy balance or other reasons.
Utilization of Regas Capacity by Region in 2018 (including re-exports), %
Utilization of Re-gas Capacity in Top-10 Countries, Holding Regasification Terminals, in 2018 (including re-exports), %
New LNG receiving facilities are being actively built, supporting their surplus in the global market. In particular, average terminal load figure was 39% in 2018. Asia has the highest level of capacity utilization rate on average – 51%. The driver was the new large consumers in China and India, with a capacity utilization of 77% and 86% each. The lowest regional performance happened in the North and Central Americas – 10%. Due to falling demand for imported LNG, Middle East terminals reduced their load to 26%, while in Europe the infrastructure was used by 30%. Spain and the UK, which have the largest capacity for the import of liquefied gas in Europe, utilized them by only 25% and 14% respectively. And the lowest rate among the largest holders of re-gas capacity had the USA – less than 2% due to increase of own production.
US claims for the role of a key and balancing LNG supplier in the global market and, as a result, as a controller of price trends.
The USA has got unique conditions for the development of LNG production. In the mid-2000s, when domestic production began to decline in the United States, LNG terminals were built in the country for imports of more than 70 million tons per annum. However, successes in the development of unconventional gas reserves (tight and shale gas) first made these investments useless, and then led to the fact that part of the LNG receiving infrastructure was complemented by strings for liquefying and exporting liquefied gas. Gas purchased from producers in the free market based on hub prices should be the resource base for them.
US LNG Capacity Development Plans
Thus, a new form of LNG project organization was established. Capacity owners sell them under a tolling scheme or in conjunction with obligations to pay for feed-in gas at a price of 115% HH (Henry Hub) for the projects in the Gulf of Mexico. Capacity is booked on a long-term basis (15-20 years) with mandatory payment, regardless of market conditions (liquify or pay). The cost varies in the range of 2.5-3.5 USD / mmbtu. So, the LNG buyer or capacity buyer in the tolling agreement assumes the risks of changes in gas prices in the US market.
At the end of 2018, three projects with a capacity of 24.6 million tons per year operated in the United States and another 47.8 million tons per year were under construction (52% of total in-building facilities), after which the United States would be able to become the third largest LNG supplier after Australia and Qatar. In addition, FEED was completed for 113.6 million tons per year (or 70% of all FEED completed projects in the world), for which FID is being considered in coming years.
Implementing at least half of these projects will make the USA the largest nation in the LNG market, and, moreover, it already has enormous liquefied gas receiving capacity. This allows them to claim the global balancing point of the market for liquefied gas, or market regulator in other words. Full capacity utilization and huge LNG exports will put pressure on world prices during periods of high market conditions and, conversely, withdrawal of some volumes for US needs during periods of low prices and high supply, when internal production will be too expensive for the value chain (however buyers would be obliged carry the costs of idle liquefaction capacity), will allow prices to increase when it is beneficial for Washington.
Key challenges for the development of the LNG industry
Despite the 50-year history of the LNG industry (it cannot be called young at all), rather high rates of development in recent years and high potential, projects in their mass remain expensive, require a long-term approach in planning, access to technologies and the ability to adapt their specific conditions, with high risks of increasing costs and time during the construction process. In addition, various geopolitical risks associated with overall security in gas production regions, control of the resource base and transportation routes, with restrictions on technology transfer and financing, emerge as a significant threat.
Huge capital costs for building liquefaction trains.
The large-scale LNG project is a “synonym” for multibillion-dollar investments. We say LNG project and mean billions of dollars in capex. This was a natural restriction for the implementation of projects on poor reserves. At the same time, the projects implemented in this decade can see a wide variation in both the total amount of costs and the relative costs per unit of liquefaction plant performance. In the current decade, more than 330 billion USD were invested in LNG production projects, which made it possible to add about 140 MTPA of installed capacity. The industry average cost per ton of productivity can be estimated at around 2,400 USD. This is quite a lot, and still it does not take into account the capital expenditures on the construction of a fleet of gas carriers and regasification facilities, necessary parts of the trade chain before the natural gas produced for the transportation in liquefied state can get into the network on the way to the final consumers.
LNG Projects’ Capital Expenditures (including upstream capital expenditures), USD
Moreover, many new LNG projects do not take into account the capital costs of upstream and midstream to supply feed gas to the liquefaction trains. In particular, such model is typical for American LNG units (where a ton of installed capacity is estimated at 600-800 USD). And, thus, the average price per ton of installed capacity for other projects in the world grows up to 2,800 USD (18% more than total average).
Australian wave was the main driver for that LNG-cost rally. Operators faced a full range of problems (from budget growth to a sharp deterioration in market conditions, both in foreign markets and in the domestic market for factories in Queensland which are also absorbing gas from the local market forcing escalation of domestic wholesale price). The implementation of 8 projects in Australia with a capacity of 67 million tons cost about 230 billion USD, and the average cost of a ton of capacity reached 3,400 USD. Gorgon and Ichtys are on the top of the most expensive LNG projects in the world, despite the fact that some of the majors – Chevron, ExxonMobil, Shell and Total – are the key stakeholders and have spent about 100 billion USD in total to develop these ventures. Finally, the cost of the Gorgon per ton of installed capacity amounted to 3,500 USD, while Ichtys jumped above 5000 USD per ton. Cost and schedule overruns are common problems for the industry, they may affect any project no matter which type of consortium implements it.
LNG Projects’ Capital Expenditures Per Ton of Production Capacity (including upstream capital expenditures), USD
* regular LNG production managed to start in 2016 only
** Australian projects implemented on the resources of coal-bed methane production
*** US projects that do not have their own resource base
**** excluding costs for the purchase of feed gas
Increased price volatility and risks, both for investors in production facilities and for consumers.
LNG import prices are largely linked with the oil market dynamics, and it, in turn, is used to be very volatile. In addition, the rate of change in price trends has increased in recent years. During 10 years, there were two large recessions (2008–2009 and 2014–2016), when oil price busted 4 times from the top. However, in annual average, the collapse of oil price in 2009 amounted to 60%, and in 2015 to 89%, moreover, in 2016, the decline continued. Price recovery had slowed down and even required special measures from exporting countries to bring the market back to the price growth. However, even OPEC+ deal, Iran tensions and economic collapse in Venezuela did not allow prices to return to the pre-crisis level of 20 USD per MMBTU.
Gas prices in import-dependent regions largely followed the oil path, and the average price of Japan imports corresponded to it to the greatest extent, as the country is fully dependent on LNG supplies. In China and Europe, importing significant volumes of pipeline gas and having their own production, the price movement was smoother. But since 2016 Japan price converged with Chinese LNG import average price.
Yearly Average Natural Gas Prices in Different Regions, USD per MMBTU
China replaced Japan as a main demand driver in LNG market. As a result, the spread of gas import prices between Asia and Europe decreased from 6-8 to 2-3 USD / MMBTU.
The price level prevailing in the LNG market is very low for expensive Australian project and is very tough to buyers of American liquefaction facilities either. The graph below shows that since the launch of the first train of the LNG plant in the Gulf of Mexico in February 2016, the cost price of American LNG at the exit from the plant (FOB in GoM), excluding delivery costs, was only twice noticeably lower than the price of pipeline gas imports in Europe (in February and March 2018).
Moreover, from May 2016 to October 2017 (with the exception of January-March 2017), the price of liquefied gas from the factory in the United States was higher than the price of spot gas that entered the Japanese market.
Monthly Average Natural Gas Prices in Different Regions, USD per MMBTU
Obviously, the gas prices movements, which for considerable periods of time do not cover the costs of most new LNG projects, are a serious challenge in making new investment decisions. It requires to seek for both ways to reduce capital investments and hedging mechanisms for the risk of price fluctuations in sales markets when organizing project financing.
Despite quite high demand growth rates in LNG during recent years and a fairly optimistic consensus forecast of market development in the mid- and long term, demand fluctuations caused by a slowdown in global (or key countries) economic growth or new restrictive policies may challenge this common picture.
LNG will have to compete with cheaper energy resources in the markets of developing countries and with subsidized renewable energy sources in the markets of developed countries. In addition, the growth rates of individual segments, for example, in bunkering will depend on maintaining a bundle of oil and gas prices. If there is a real separation of the pricing with full gas-gas competition, then at some point in the future, the competitiveness of LNG in maritime transport might be questioned.
This also can hinder the adoption of new investment decisions or lead to their uneven distribution over time, maintaining the cyclical nature of the LNG market development in the long term.
Geopolitical instability and threats for sustainable development of the global gas trade.
Risks associated with geopolitical tensions in some regions and in the world as a whole are always sensitive to high cost projects with long payback periods targeting different markets across the globe. For the LNG industry, important regions of production are traditionally states of the Middle East, North and Central Africa, either with high political risks, or with the potential for instability or even military conflict. At present, one LNG plant has been completely stopped due to the civil war (in Yemen), at different times, facilities in Algeria and Nigeria were attacked causing shut downs of LNG production and exports.
Another aspect where geopolitical risks are significant is the possibility of imposing sanctions that can prohibit or restrict the implementation of LNG projects, as we can see in Iran, which has very high undeveloped reserves, and advantageous geographical position between core markets. It should not also be forgotten that one of the largest LNG producers, Qatar, has recently been put under sanctions from neighboring Arab states. LNG exports were not affected by the crisis, but risk of further escalation can’t be fully ignored.
The picture is complemented by the fact that more than 80% of the existing LNG plants in the world were built with the liquefaction technology and equipment of the American APC, and the rest share of projects used licenses from ConocoPhillips, Shell and Linde meaning extreme sensitiveness to sanctions and restrictions.
Finally, in the field of sea transportation, there are enough “bottlenecks” where the geopolitical situation may be a risk factor. In the Middle East – the Suez Canal, the Bab-el-Mandeb and the Strait of Hormuz, in Asia – the Strait of Malacca and the Panama Canal in Central America.
All that challenges may slow down LNG rise and require careful treatment to find tools to manage risks. However, the opportunities that emerge for the gas industry as the LNG market develops are large enough to make this story worth it.