IMPORTANT LNG MARKET
NGW - The LNG market has grown strongly in the last few years. In 2008 the global export capacity was 270bn m³/yr while in 2016 it was around 400bn m³/yr (+150%). The International Energy Agency in 2011 predicted that by 2015 gobal trade would reach 450bn m³/yr. These higher expectations resulted mainly from the aftermath of the Fukushima accident and Asian growth more generally, notably China.
Since then the market has changed: China's growth has slowed, Japan has restarted some nuclear plants, demand in the EU has been weak and this is reflected in lower prices. All this has contributed to the cooling of enthusiasm about a "golden age for gas".
NGW on December 21 reported Qatar's energy minister announcing an expected growth in gas trading, ranging from 1 trillion to 1.65 trillion mn³ by 2040, of which 40% would be LNG, compared with 30% this year. He said the volume of LNG is expected to have a compound annual growth rate of 3% until 2045. The market share of spot and short-term LNG trade has scaled up from 18% to 30% in six years (+166%) and it is expected to grow further.
However, not all that glitters is gold. There are some critical aspects to consider about this new state of affairs.
In 2011, when the IEA first mentioned the possibility of a "golden age of gas", it forecast LNG trade at 480bn m³/yr by 2025 without any constraints. The said growth in capacity was roughly divided thus: Russia and Canada, each with 30%, Australia and US each with 20%.
In 2016, looking at the 480bn m³/yr above, we can say that the US has realised 60% of its full-potential" (with no-constraints); Australia 35%, Russia 15% and Canada has made negligible progress so far.
For the countries that have missed the LNG boat, the reasons are not discussed in this piece but we can say that the slump in gas prices and the financial availability (for Russia, read also "sanctions") have been critical.
How to get liquidity? The first step is to "depoliticise" gas as much as possible. The Istituto Affari Internazionali (IAI), an Italian think tank, in its book has highlighted clearly this point.
Even if gas is available worldwide, the pipeline model cannot guarantee the liquidity needed to jump into the "golden age". You need to create a glut, you need to be able to market it freely and you need a spot/short term market. Nowadays there is still a predominance of long term contract but things are changing.
Sarah McFarlane, correspondent of the Wall Street Journal, in December wrote about the possible introduction this year of US Gulf Coast LNG futures contracts in both the Chicago Mercantile Exchange and the Intercontinental Exchange. This will allow traders to speculate on spot prices and will make the commodity "more liquid".
If you remember, it was 1983, Lower Manhattan, on the eighth floor of the World Trade Center and the New York Mercantile Exchange introduced the first futures contract in crude oil. The rest is history.
We can say that 2016 has been not bad in terms of liquidity: Spot LNG demand has soared in countries like, Egypt, Pakistan, Jordan and also in Latin America. Egypt is developing its huge gas potential from new discoveries in the Mediterranean Sea.
To give an idea, Bloomberg Markets said in November that in 2020 Pakistan could reasonably need imports of 5-20mn mt/year; China and India this year have in 2016 combinedhave imported 40mn mt/yr.
Most of this growth will be met by supplies from US. For many of the US projects, contracts in place will be able to grant the highest flexibility to the industry. The buyers pay a fee for liquefaction capacity and once LNG is lifted they are free to ship wherever they want... somebody is speaking about US Energy Superpower, thanks to LNG.
Progress has also been seen on the demand side. The floating storage and regasification units (FSRUs) are spreading, this is a plus for flexibility and liquidity, because it takes just a year from ordering to receiving an operational FSRU. The above-mentioned IEA document, also reports that, at the end of 2016, there are – under construction – 118bn m³/yr of import capacity, of which 30% are FRSUs. Of that additional capacity, 80% will go to Asia (mainly China).
But Europe – Poland, Lithuania, perhaps Croatia – is also adding regasification capacity, in order to increase energy security. In its ambition to reduce dependence on Russia, the EU can benefit in the medium to long term from the developments of the Mediterranean Gas Hub8, a topic of growing interest, all the more so now that BP and Rosneft have each taken a slice of Eni's Zohr field offshore Egypt.
Rosneft's deal (December 13) is by far the most important in terms of size: $1.1bn. It is also is a signal of Russia's growing interest in the Mediterranean Sea. Furthermore, it is worth mentioning that only two days before December 12, Rosneft sold a 19.2% stake for $10.1bn to Qatar Investment Authority and Glencore (the trading company).
It is important to add that Rosneft (and Novatek) are growing in the domestic market, eroding Gazprom's market share and, and that since 2013 Rosneft has been able legally to export Russian gas through LNG. These are probably the two players that you will have globally, contributing to the glut and to the "LNG Energy Order". From a geopolitical point of view this move represents a significant step in joining the Mediterranean Gas hub, also a kind of "diversification" for Russia related to the growing pressure that the EC is applying to Gazprom.
We are not talking here about the growing influence that Russia is gaining in the Mediterranean and the Middle East, but we can say that on December 24 Russian information agency Tass announced the expansion of a naval base in Tartus, Med Sea. This is a step, Russia wants to stay in the Mediterranean, participating in the (any) new gas hub.
NGW reported December 22 the head of Gazprom-Export Elena Burmistrova describing US LNG as "a significant but purely a symbolic event". This is true so far.
An interesting piece by the Financial Times correspondent Jack Farchy makes the point that in the event of a price war, Gazprom will emerge the winner. But the point is that Gazprom has had to adapt to global markets and consequently to European requests, especially for new contracts. This process resembles what is happening for Opec: oil producers know that once the price reaches a certain level, shale oil comes on stream once more and drags prices down.
The same is true for gas: you have an upper cap on price but you can imagine a kind of "valve" that is going to be automatically opened once the price reaches a "set point".
This downward pressure on price affected also the last negotiation between Sonatrach Company about gas' supplies to Italy. As reported by Sissi Bellomo, commodities' correspondent for Il Sole 24 Ore, this agreement is also of huge impact because it de-links the traded gas from oil, while it links the price of traded gas to the PSV. The PSV is the virtual exchanging point used as price reference in Italy.
Remaining in north Africa, the last news about gas market regulation regards Egypt, where on December 21, as reported by NGW, the House of Representatives passed a law to establish a new gas regulator. The goal should be increase deregulation and liberalise the market.
Finally comes natural a question: what about the US? The US is in a transition phase, or rather, showing signs of breaking with the past. Nobody knows about the future agenda for the new Administration, even if some points may be guessed at.
One of these points regards another sea crucial for the LNG industry: the South China Sea (SCS). SCS is very important, a report released in middle 2016 by the "Center for a New America Security (CNAS) a US' Think Tank, presents the SCS as one of the most critical topics on the agenda. Some 6 trillion ft³ of gas cross these waters annually, and 16mn mt of oil. These numbers will grow: the EIA reported in 2013 that almost a third of global crude oil and half of LNG trade moves across the SCS.
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