LNG MARKET: TRENDS AND OUTLOOK
Natural gas international markets are constantly growing. Despite the ongoing crisis, Europe is increasing its dependence on imports, while emerging economies in Asia face the daunting task of fuelling their economic growth.
Traditionally, natural gas is imported via pipeline: a long chain of steel pipes, linking a producing region in one country to the domestic network of another one. This is the method of choice for transporting large quantities of gas at the regional level: it is technologically easy and economically competitive. As a consequence, it accounts for nearly three quarters of the international market.
Pipeline transport entails two main limitations; the first is the dramatic increase in cost for long distances, especially when offshore sections are required. Over a few thousand kilometres, the feasibility of the pipeline is uncertain or indeed entirely precluded.
Another limit is represented by the strong interdependence between exporter and importer that a pipeline entails: in the case of a problem upstream, the consumer cannot use the pipeline to import gas from other sources. The corollary of that is that if the importing market cannot absorb all the volumes exported by the pipeline, the exporting country is forced to reduce its production.
Those limits also play a central role in explaining why natural gas markets never evolved into a fully global market. Liquefied natural gas (LNG) offers an alternative to piped gas whereby this evolution could be possible. In this process, gas is cooled to approximately −162°C at atmospheric pressure, becoming a fluid which can be transported by special tankers.
LNG trade requires special terminals for liquefaction and regasification processes. The infrastructure is very expensive; export terminals, notably, can easily cost over 10 billion dollars per unit. However, once online, those terminals can supply natural gas to virtually any regasification terminal in the world, creating the technological conditions for a global market.
LNG IMPORTS: AN ASIAN BUSINESS
Over the past decade, the LNG market has steadily expanded: from approximately 210 billion cubic metres of natural gas (bcm) in 2006 to 315 bcm in 2013. Eastern Asia traditionally accounts for the largest part of the market. In fact, distance from the producing countries and geographical features such as insularity or limited availability of local energy sources created the conditions for an early and massive development of the LNG technologies in the region. In 2013, Eastern Asian countries accounted for three quarters of the global LNG consumption. Three final markets in particular provided the bulk of demand: Japan, South Korea and China.
The Japanese economy is heavily industrialised, with large primary energy consumption combined with a particularly small domestic production of energy. As a consequence, it relies on imported fossil fuels both for transport (oil) and power generation (mainly natural gas). In 2010, Japan imported 92 bcm of natural gas - 32% of the world total – exclusively via LNG. After the Fukushima Daiichi disaster, Japan substituted a significant share of its nuclear power generation with natural gas, increasing its dependence on LNG imports. Thus in 2013 Japan imported 116 bcm, 37% of the world total.
South Korea is similarly dependent on imported gas for power generation, and it is the second final market at the global level: it imported 54 bcm of LNG in 2013, i.e. 17% of the world total. The third is China, which imported 54 bcm (9%). Unlike Japan and South Korea, the Chinese economy currently has a low level of dependence on imported energy, since it retains a large domestic production. However, its increasing final consumption and the need to reduce coal consumption in several polluted regions are driving a significant increase in natural gas imports, both via pipeline and LNG.
Besides those three large consumers, other growing Eastern Asian economies represent a dynamic market for LNG. In particular, Taiwan is a relatively mature market, while India is set to become one of the most important players at the regional and global levels in the coming decades. Both countries imported 17 bcm each in 2013, i.e. slightly more than 5% of the world total.
Outside Eastern Asia, the most important LNG regional market is Europe. Demand in the region has been significantly reduced following the economic crisis and massive subsidies provided to renewable sources, which undermined final market for natural gas in the power generation sector. Moreover, the flexibility of LNG supplies allowed exporters to reroute their flows towards more dynamic markets after the onset of the current crisis. As a consequence, EU overall demand of LNG dropped from 80 bcm in 2011 to 39 in 2013, 13% of the world total. Four countries constitute the EU core markets: Spain (12 bcm), the UK (9), France (8) and Italy (5). Germany, the main European gas market, has no regasification capacity, relying on piped gas from Russia and Norway. The only other relevant natural gas market in the region, Turkey, imported 6 bcm via LNG in 2013, and was not affected by the EU's economic crisis.
Latin America is a smaller but more dynamic regional market. Overall, its consumption amounted to 25 bcm in 2013, with an annual growth of 34% and a global share of 8%. Mexico is the largest importer (8 bcm), followed by Argentina (7), Brazil (6), and Chile (4). The increasing role of Latin America is driven by the general economic growth and is expected to continue, albeit at a slower pace. Other consumers from Israel to Kuwait and Dubai, are also minor importers with limited growth expectations.
SUPPLYING A GROWING MARKET
LNG production is currently dominated by a single giant player: Qatar. Unlike its Arab neighbours, Qatar has relatively limited oil reserves but massive gas reserves: 25.000 bcm, equal to approximately 160 years at current production levels. Due to its large internal production and significant international investments at the beginning of the 2000s, the country has dominated LNG markets for a decade. Exploiting its geographical position, Qatar is a major supplier to both Asian and European importers, partially rerouting its flows according to the evolution of final demand, a strategy which is not available to competitors reliant on pipelines. In 2013, Qatar exported 104 bcm via its twelve LNG trains.
Beyond Qatar, there are four medium-sized producers strongly focused on the Eastern Asian market: Malaysia, Australia, Indonesia and Nigeria. Malaysia and Australia each export more than 30 bcm of LNG, i.e. 10% of the global market. Their gas industries are growing and both are expected to increase their export volumes. Indonesia on the other hand is a mature producer which is striving to maintain its current export levels (25 bcm) and to supply its rapidly growing domestic market. Nigeria, by contrast, has a decreasing internal consumption and large reserves, but it is facing a deteriorating security environment, which prevents new international investments in upstream and export capacity. As a consequence, exports from the country are likely to remain at their current level (22 bcm).
Other major supplies of LNG are small producers which export exclusively through LNG. The largest is Trinidad and Tobago, a small insular state in the Caribbean, which exported 18 bcm in the 2013 and is a key player in the region. Other relevant small producers are Oman (11 bcm), Brunei (9 bcm) and Yemen (9 bcm), followed by several other smaller ones.
Natural gas producing countries that export only a minor part of their total production via LNG represent a further category. The most important is Russia, the world's biggest exporter of gas, which in 2013 supplied more than 200 bcm to international markets, 14 of which via the Sakhalin liquefaction terminal. A similar amount was exported by Algeria, while a much smaller amount was exported by Norway (4 bcm). Incidentally, all three countries are major suppliers of the EU market via pipeline, thereby limiting the incentives to promote a massive development of their LNG capacity to supply their core markets.
NEW INFRASTRUCTURES: AN LNG GLUT?
Natural gas export is a capital-intensive activity, which in the past developed thanks to long-term commitments, whether in the case of piped or liquefied gas. This is bound to remain a central feature even in the current decade, since the global market for LNG has not yet developed a liquidity and a hub-based structure which could allow a substantial decoupling between infrastructural investments and a prior long-term commitment made by one or more buyers. A potential evolution towards a substantially liquid market may come in the next decade, but it depend on the further expansion of the LNG export capacity and a larger diffusion of the import terminals, both in terms of capacity and the countries involved.
A significant boost to the size of the LNG market will come from projects currently under construction and which are expected to be commissioned by the end of this decade. The most important aspect is liquefaction capacity, since import capacity is currently oversized, even if unevenly distributed: 104 terminals in 29 countries and 950 bcm per year represent a massive endowment. Local investments in more dynamic markets will be required, but in general regasification capacity is unlikely to represent a bottleneck for the market at this stage.
Export capacity is instead heavily exploited, and new supplies will play a decisive role in the evolution of the market. At the end of 2013, theoretical global liquefaction capacity amounted to approximately 396 bcm per year. With the exception of Algeria and Indonesia, other exporters had their capacity nearly saturated and many of them are involved in massive investments. If we consider both facilities under construction and already concluded final investment decisions, the capacity commissioned between 2014 and 2020 should amount to 147 bcm per year, i.e. an increase of 37%. Considering that Indonesia's capacity will be reduced of 6 bcm due to the conversion of the Arun liquefaction plant into a regasification terminal, maximum theoretical exporting capacity should amount to 537 gmc in 2020.
The largest share of this massive capacity expansion will take place in Australia. If all the new plants are commissioned according to the plans, the country's liquefaction capacity will expand from 32 to 114 bcm per year, surpassing Qatar as the world's largest LNG exporter. Indeed, more than half of the capacity currently under construction is located in Australia's offshore territory, allowing the country to exploit its vast reserves and its proximity to the Eastern Asian markets.
Russia and the United States will also see their share in the LNG market increase dramatically. Russia will exploit its far Eastern and far Northern fields to diversify its gas exports and to reach new customers outside Europe, adding 22 bcm per year to its current capacity of 13 bcm per year. In the US, the availability of cheap natural gas from non-conventional fields has created strong incentives for energy operators to export LNG, in order to capitalize on the differential between low domestic prices and high international prices. Despite a large number of applications, only the Sabine Pass plant obtained all the necessary authorisations, leading to a final investment decision for 21 bcm per year. Other projects are lagging behind and are increasingly unlikely to become fully operative during this decade.
New capacity will also come from Papua New Guinea, where a new plant started commercial operations in May 2014. It will be fully operative by the end of this year, reaching a theoretical capacity of 9 bcm per year. Additional supplies will come in the next few years from Mozambique, Malaysia and Colombia, with a combined new export capacity of 13 bcm per year.
LNG liquefaction and regasification capacity would be useless without adequate transport capacity. The LNG tanker fleet is undergoing a massive expansion, due to a surge in orders for new ships between the end of 2000s and the beginning of the 2010s, coupled with a limited number of old ships laid up or scrapped. At the end of 2013, the total LNG tanker fleet consisted of 354 large vessels and 24 small ones.
A notable positive trend emerged in 2013: 20 new LNG vessels were delivered, a significant increase compared to just 2 in 2012, while just 5 were scrapped and 7 laid-up. At the same time, 44 new ships were ordered, increasing the book order for transport vessels to 103 units. In 2014, 26 deliveries are expected, confirming the trend of transport capacity expansion.
As a whole, despite representing a potential criticality, enough vessels are currently available and their number is consistently growing. Therefore, the availability of transport capacity is unlikely to be a major barrier to the development of the LNG trade during the current decade. Considering that it usually takes approximately three years for a vessel to be delivered after it is ordered, for the next decade, much will depend on the actual timing of the expansion of future LNG liquefaction plants and the signals that shipping companies receive from the day-rates.
To sum up, from the infrastructural perspective, the key driver of the expansion of the market will be the commissioning of new liquefaction capacity and its timing, while transport and regasification will represent a relevant but secondary factor. However, from a broader perspective, the most important element in understanding the evolution of the LNG market will remain final demand.
CHINESE DEMAND: THE KEY DRIVER
East Asia will represent the core final market for LNG in the future. However, a major shift is underway: while current demand is coming mainly from Japan and South Korea, new demand will come from China and, to a lesser extent, India. In 2013, China imported 47 bcm of gas, of which 25 via LNG: less than a quarter of the Japanese imports. However, according to the base scenario proposed by the International Energy Agency (IEA), Chinese natural gas imports will be nearly 130 bcm in 2020 and more than 200 in 2030. LNG will represent a sizeable share.
Long-term forecasts are usually a very difficult, and subject to a high level of uncertainty, but the trend is clear: China's final demand of natural gas is set to increase markedly, as a consequence of the both the overall economic growth in the country and an increasing need to limit pollution in urban areas. At the same time, internal production will provide a shrinking share of the final demand, increasing dependence on imports.
Chinese importers are investing heavily in new capacity. Currently, the country has an overall regasification capacity of 59 bcm per year, distributed across 11 terminals, the oldest of which became operative as recently as 2006. In 2013 alone, 4 terminals were commissioned, with a collective capacity of 19 bcm per year. Moreover, at least 4 terminals are under construction, and 2 of those are expected to become fully operative during 2014, adding a capacity of 7 bcm per year. Several more terminals are at various stages of construction and planning.
All in all, China's infrastructural system is gearing up for a strong increase in LNG inflows, and Chinese companies have already signed long- term contracts to deliver at least 50 bcm per year through 2030. China is therefore becoming a major competitor for international supplies of LNG, but several factors could limit the scope of this transformation, or change its spin. The first is the actual pace of the Chinese final demand, since current assumptions are based on the strong long-term growth of the Chinese economy, a trajectory which is far from certain.
Even assuming a massive increase of final demand, another threat to LNG demand is looming: competition from piped gas. Unlike Japan and South Korea, China can rely also on imports via pipeline, arriving from three sources: Central Asia, Myanmar and Russia. Pipelines running from Turkmenistan to Western China are the most important, with a capacity of 30 bcm per year and an undergoing expansion up to 80 bcm per year. In addition, a smaller pipeline is linking offshore field in Myanmar with Southern China, with a maximum capacity of 12 bcm per year. Eventually, after May 2014 agreements with Gazprom, a brand new pipeline will connect Eastern Siberia with North-eastern China, with a capacity of approximately 40 bcm per year by 2020. All in all, by the beginning of the next decade, the Chinese gas system will boast an annual import capacity of more than 150 bcm via pipeline.
Even considering an adequate level of spare capacity, the combined import capacity will exceed Chinese demand at least until the beginning of the 2020s. This situation will affect the global market; LNG exporters will have to compete with both other LNG producers and with exporters of piped gas. Unlike the current situation, wherein Japanese and South Korean importers lack alternative sources and are forced to pay a high price for LNG, major consumers will have more market power. As a consequence, current price differentials – up to 100% – between Eastern Asian markets and other markets are likely to shrink.
India will also play a smaller though still relevant role in the evolution of the global LNG market. Currently, India has significant regasification capacity: 4 terminals with a combined capacity of 38 bcm per year, of which 12 were commissioned in 2013. Moreover, another terminal of 7 bcm per year is under construction and several others are at various stages of planning.
Currently, all Indian imports are via LNG and the construction of a pipeline from Iran or Turkmenistan faces major geopolitical obstacles, and is unlikely to materialise anytime soon. As a consequence, LNG will supply the additional import demand of the Indian market. According to the IEA's predictions, India will increase its imports from 17 bcm in 2013 to 25 bcm in 2020 and 54 bcm in 2030. The sheer size of India's estimated demand will affect global markets, creating more competition. However, unlike China, India has no alternative import sources to LNG and therefore the position of the producers will be strengthened.
OUTLOOK TO 2020 AND BEYOND
LNG is an Eastern Asian business and the situation is unlikely to change significantly within the current decade. Asian economies are growing, driving up energy demand. China and India will lead this trend, but smaller developing countries in the region will also see their energy imports grow steadily. Moreover, industrialised economies, namely Japan and South Korea, will continue to rely on massive energy imports, including LNG.
Outside the region, a significant increase in LNG imports is likely only in Latin America, despite some uncertainty in the fundamentals of economic growth. Northern America is set to become an exporter of LNG, completely reversing expectations of just a few years ago.
The European case is more complex, but the outlook for LNG demand is likely to remain very weak during this decade, and at best uncertain for the next one. European economic growth is weak and even in the case of a significant recovery, natural gas consumption will take a decade to return to pre-crisis levels, since improved efficiency and subsidized renewables have structurally reduced final demand for fossil fuels. Moreover LNG faces strong competition from exporters of piped gas, which are captive to costumers and ready to accept lower prices. Even in the most dynamic market, Turkey, LNG is likely to remain a secondary source of gas, due to the competition of piped gas from different sources.
The only major driver for a surge in the European demand of LNG may be a further destabilisation of Ukraine or Northern Africa, with long interruptions to pipeline imports from Russia and Algeria. The impact on the LNG market will depend on the severity of those interruptions, but the likelihood of this scenario is very low. Moreover, interconnections between different European networks have significant bottlenecks, limiting the scope for a potential substitution of piped gas with LNG imports without massive investments.
Considering LNG prices, current differentials between Eastern Asia and the rest of the world are based on the lack of alternatives for the main importers, Japan and South Korea. Increased supplies and a certain arbitration capacity for the Chinese buyers may lead to a structural lowering of the price level on the East Asian markets. However, the strength of the final demand in the region is likely to justify a positive differential between Asian and non-Asian price seven in the future decade.
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