Global LNG outlooks test conventional wisdom of supply glut
When Shell last month presented its first global LNG Outlook since its 2016 acquisition of the UK’s BG Group, it surprised some by effectively denying the existence of a global LNG supply glut, pointing instead to a well balanced market where all produced LNG cargoes were being consumed.
Much of the commentary in recent months has been telling us the LNG market is already suffering a supply glut and is heading for a period of sustained oversupply until at least the start of the 2020s.
LNG prices across the globe have fallen to multi-year lows — other than a mostly weather-related spike in late 2016 — and the expected slew of new project start-ups in 2017 from Australia and the US has been forecast to lead to a hugely oversupplied market with demand growth unable to keep pace.
The report from Shell — which is now more exposed than ever to LNG market dynamics since the BG purchase — was in stark contrast to other views from the industry.
Some players already talk of an oversupplied LNG market, with things only set to worsen in the coming years.
Pablo Galente Escobar, head of LNG at global trader Vitol, said at a London conference last month his view of the LNG market was “very different” to Shell’s.
“We think the market will be significantly oversupplied over the next five years,” he said, pointing to expected LNG supply growth to 400 million mt/year by 2020 from 240 million mt/year in 2015.
This growth, he said, was unprecedented in the history of commodities, and represented the biggest “supply shock” he had ever known.
The CEO of Italy’s Eni pointed last month to a period of oversupply that would end only in time for some of its new LNG projects to start operations.
“In LNG we have a situation of oversupply and we expect a re-balance early next decade when demand catches up,” Claudio Descalzi told analysts at a London strategy presentation.
“Then, we see a need for new supply, which is a huge opportunity for our gas projects coming on stream,” Descalzi said, referring to Eni’s planned Mozambique and Egypt LNG export projects, among others.
BP, in its latest energy outlook in January, also pointed to strong LNG supply growth in the period 2017-2021, while Norway’s Statoil said in its own outlook that the critical question was whether new gas supplies would be developed in time to meet future forecast demand, or if the current gas surplus would turn into a deficit and a tight market.
“The global LNG market is exposed to boom-and-bust cycles — the underlying growth in world LNG demand is itself not sufficient to absorb the scheduled growth in supply,” Statoil said.
But, as Statoil says, markets have to balance.
Therefore, the LNG glut is likely to accelerate the transition of global LNG into a more regular commodity market.
And this is an increasingly widely accepted view — that LNG is becoming more and more commoditized and more and more of a global fuel.
So, are these ‘views’ driven by the agenda of the view-giver?
Vitol and the other global commodity traders are always on the lookout for opportunities to exploit margins, buoyed by price volatility, and over- and under-supply often lead to fast and unpredictable price movements.
In addition, traders are more willing to trade with credit-risky countries — the likes of Egypt — which are using LNG imports to either replace domestic production or to kick-start a gas-to-power industry.
A well supplied market is more likely to entice new countries into becoming LNG importers, giving traders like Vitol more room in a market that has been traditionally dominated by major oil companies.
Likewise on the demand side, Hoegh LNG — a leading supplier of floating storage and regasification units (FSRUs) — said last week the “long LNG market and competitive LNG prices” had led to increasing utilization of new importing facilities, “the majority of which are FSRUs”.
No surprise there.
As for Shell, well having spent more than $50 billion to buy BG in February 2016, it now has LNG sales of 57 million mt/year, around 22% of the global market.
The sales price for its LNG obviously matters given its vast LNG portfolio, so the more balanced the market the better for its bottom line.
“We read about a flood of LNG, and that is clearly not the case — we just do not see it,” Steve Hill, Shell’s head of energy and gas marketing and trading, said at the London briefing in late February.
Shell justifies its stance on LNG market dynamics by pointing to various pieces of evidence:
1) Every cargo that could be physically produced in 2016 was produced and was consumed;
2) LNG flows to the liquid markets of Europe — often seen as the market of last resort in an oversupply situation — were flat, and to Belgium and the UK down, which Shell said was a good sign and a “very clear demonstration” of the strength of demand in LNG;
3) LNG prices were “healthily” priced as a percentage of crude oil.
Hill said last month that demand growth would keep pace with supply growth in coming years and demand growth would be accelerated by low prices and many growing markets are those with already mature infrastructure like Egypt and Pakistan.
Shell is not alone, meanwhile, in signaling caution over predictions of LNG market oversupply.
The Oxford Institute for Energy Studies (OIES) last month published a paper entitled “The Forthcoming LNG Supply Wave: A Case of ‘Crying Wolf’?” that warned against taking the wave of LNG supply growth for granted.
Author Howard Rogers argued that the eventual outcome and levels of LNG supplied can be very different from expectations due to:
1) Project construction schedule slippage (often associated with cost escalation above budget);
2) Commissioning problems — new plants can suffer unscheduled shutdowns and may remain offline for weeks during which modifications are carried out before commissioning is attempted again;
3) Feed gas supply issues, which can constrain supply below nameplate capacity until upstream issues are resolved.
The OIES echoed Shell’s view that the market was not oversupplied in 2016 and that Europe did not take the bigger volumes it had been expected to absorb.
But, despite its caution, the OIES said the wave would eventually come — maybe more slowly than thought — and that it would have an impact on Europe, the market of last resort for LNG.
Platts Analytics’ Eclipse Energy also sees evidence the market last year was more balanced than had been expected, due to a series of unplanned outages at the beginning of the year, coupled with the continued shutdown of the Yemen LNG plant and unexpected issues at Gorgon and Angola LNG.
Asian LNG demand was also higher than expected, with Chinese imports up to support the drive for cleaner air and Japan and South Korea both needing more LNG than expected due to issues around nuclear generation.
“Going forward the issues observed in 2016 remain key uncertainties to the realization of a global surplus, however the amount of new supply coming online should see the realization of an oversupplied market,” Platts Analytics said.
Looking at how much Europe — the market of last resort — imports is key to defining whether the global LNG market is oversupplied or not.
Platts Analytics data showed European LNG imports remained flat in the 2014-2016 period despite the fact that a market becoming oversupplied may be expected to see European imports rise to soak up the oversupply.
However, the relatively low LNG prices for much of 2016 did nothing to entice LNG into Europe despite higher demand.
Instead, it was met by pipeline gas from Algeria, Norway and Russia.
Of course, the main beneficiary of an oversupplied market for any commodity is the customer, not only because of cheaper prices but also to ensure security of supply.
The International Energy Agency said in an LNG security report last November that the massive expansion of LNG export capacity was coming at a time of weaker-than-expected global gas demand, and that the temporary excess of supplies resulting from this situation “is providing a buffer that would mitigate the impact of possible supply disruptions”.