Lauceston, Australia — The slump in the spot price of liquefied natural gas (LNG) in Asia to its lowest in three years should give pause for thought to the slew of companies planning new ventures to produce the super-chilled fuel. But it probably won’t.
The spot price for LNG delivered to Northeast Asia LNG-AS dropped to $4.65 per million British thermal units (mmBtu) in the week to March 21, the lowest since May 2016.
It’s been an unusual northern winter for LNG, with the price peaking at $10.90 per mmBtu in November and steadily sliding since then.
The more normal seasonal pattern is for spot LNG prices to peak around January before slipping in the shoulder season of spring, with the seasonal winter climb starting sometime in the third quarter.
The fact that LNG prices have performed poorly over winter is more a reflection of excess supply, rather than weak demand, with Refinitiv vessel-tracking and port data confirming that consumption has been quite robust.
LNG deliveries in Northeast Asia, which includes top three importers Japan, China and South Korea, were about 73.3 million tonnes for the four months from November to February.
The previous winter, imports for those months totalled 70.3 million tonnes, meaning that LNG demand in the top-consuming region was actually 4.3 percent higher in the winter period of 2018-19 than the same period in 2017-18.
The issue for LNG is supply, with the last of the eight major Australian projects built over the past decade coming on stream, and more volume becoming available from the United States.
It’s a problem that is likely to get worse rather than better for the rest of 2019, with capacity additions likely to swamp demand growth, at least in Asia.
While estimates of the likely increase in demand vary, none are as high as 70 million tonnes over the next two years, with a figure around half that viewed as more likely.
This means that either LNG producers will have to cut back on output, or the price will have to be low enough for the fuel to replace pipeline natural gas in markets such as Europe.
ARE NEW PROJECTS STILL VIABLE?
The current supply glut and price weakness may also cast a shadow over the next wave of LNG projects, with the frontrunners expected to start taking final investment decisions (FIDs) this year.
It’s easy to dismiss the price slump as merely seasonal, and point to expectations of strong demand growth in China and other parts of Asia in coming years.
The more optimistic versions of these forecasts see world LNG demand at least doubling in the next decade from the 321 million tonnes shipped in 2018.
Much of this demand growth is focused on Asia, with India, Pakistan and various Southeast Asian countries playing the major role alongside China.
LNG Canada, a 10 million tonne per annum project led by Royal Dutch Shell, has already taken its FID, becoming the first cab off the rank in the new wave, with first output expected in 2024.
There are 14 more U.S. and Canadian ventures slated to take FID this year or next, and they will be joined by projects in Mozambique, Russia, Qatar and possibly Australia.
The traditional model of approving multi-billion dollar projects only when offtake agreements for most of the production are finalised is also being upended, with several ventures planning on going ahead on the basis that the spot market for LNG will grow and be deep and liquid enough to absorb all the planned output.
This may be somewhat optimistic as this view relies heavily on all the emerging consumers of LNG actually building the import and re-gasification capacity, and the downstream facilities to consume the natural gas.
It is worth noting that the outlook for Japan, the world’s top buyer, is for demand to drift lower in coming years.
It’s also expected that China’s rapid growth of recent years will start to temper, especially given the likely completion of a natural gas pipeline from Russia in the next couple of years.
South Korea, which ranks behind Japan and China, is also uncertain for LNG demand in the future, given the country is now emphasising renewable energy for its future needs.
The risk for LNG producers is that if all, or even a majority, of the planned projects take FID this year or next, is that a tsunami of supply will arrive at more or less the same time, and it will be enough to swamp even the most optimistic demand growth scenarios.
Clyde Russell, Reuters