Home / Oil & Energy / General Energy News / LNG investment needed through the downturn

LNG investment needed through the downturn

Gas is the future. Among the reasons oil companies are latching onto gas as the energy transition looms are that it’s plentiful, future demand growth outstrips oil and it has relatively low carbon intensity. Amidst all this, the LNG market is set to flourish. Yet prices today are collapsing. I turned to Massimo Di-Odoardo, Head of Global Gas Research, to make sense of what’s going on.

So, Massimo, what’s triggered the price crash?
We’ve just come off the back of two strong years when surging demand growth absorbed new supply. A record 38 Mt, or 12%, of additional LNG supply comes on stream this year, so 2019 was always going to be difficult. Throw in a mild winter and nuclear restarts in Japan and South Korea, and it’s no surprise Europe is awash with LNG. Asian LNG prices have slumped from over US$11/mmbtu in October to US$4.5/mmbtu for May delivery. Right now, they are trading at a rare discount to European prices.

Are we at the bottom yet?
Probably not. Russian and Norwegian pipeline exports to Europe have held strong, and LNG imports to Europe are likely to increase this summer because of lower seasonal Asian demand and more supply coming on stream. A mild 2018/19 winter means storage levels in Europe are at record highs. The market is approaching a tipping point – if Russia and Norway don’t cut exports, European prices will go below US$3.5/mmbtu.

Is that below the cost of supply?
For some, yes. Cash costs for buyers of US LNG into Europe are at the top of the curve, ranging from US$3.50 to US$4.00/mmbtu. If prices dip below that, we could see some shipments curtailed. But short-term economics aren’t the only driver. We’re going to see huge growth in US volumes in coming years. Sellers want to prove to future buyers the merits of long-term US LNG contracts. Shut-ins would send the wrong signal.

Will low prices boost demand?
They help. At current spot prices, gas-to-power is competitive against coal, though we’re not actually seeing much switching. In Europe, gas prices need to go below USS3.5/mmbtu to displace efficient coal in Germany; whereas in Asia, lack of competition gives utilities little incentive to switch. The outlook though for LNG demand growth globally is bullish, driven by policy (such as clean air and the energy transition) and, in Europe, declining indigenous gas production. Competitive gas prices will help things along.

Are we seeing changes in LNG contract pricing?
Yes. We’ve seen Henry Hub-based contracts disrupt the market this decade because US gas is cheap. But when LNG spot prices are low, Henry Hub-linked contracts are out of the money – not good. To be competitive as consumer markets open, buyers are looking for more innovative pricing. At LNG2019 last week in Shanghai, Tellurian Marketing announced a heads of agreement with Total, indexed to Asian LNG spot (JKM). Separately, Shell announced an agreement with Tokyo Gas, linked to coal prices – aimed squarely at LNG competing with new-build coal plants. We’ll see a lot more creative pricing as buyers and sellers struggle/fight/work/try to stay competitive.

When will prices start to recover?
Prices will double inside three years. Supply additions slow dramatically from 2021, then a yawning gap opens for new volumes post-2023. Some new projects need upward of US$7/mmbtu to break even. The lead time for new LNG supply is about five years on average from FID to commissioning so investors need to start building. LNG Canada (Shell), Tortue (BP) and Golden Pass (ExxonMobil/Qatar Petroleum) got the green light in the last few months. A host more FIDs are coming that will lift total investment in new projects to over US$200 billion, and bring over 100 mmtpa of new LNG supply to the market by the mid-2020s.

So investors in new LNG projects should hold their nerve?
Yes, the market’s going to need the gas. The projects just need to deliver on time and on budget. The lowest-cost producers will be the winners, resilient in any market conditions.
Source: Wood Mackenzie

Recent Videos

Hellenic Shipping News Worldwide Online Daily Newspaper on Hellenic and International Shipping