The Rising Market of Liquified Natural Gas (LNG)
Anwar Altaqi – Esam Aziz
In 2016, the increase in shale gas output in the United States was marginal, while total US gas production showed negative growth for the first time since 2005. Economically speaking, the shale industry has yet to turn a profit, which adds to the debt burden of shale producers. Given the current production dynamics, the US gas output may drop even lower by the end of 2017.
Furthermore, Canada’s shale gas sector continues to develop at a very slow rate, due to limited possibilities for monetizing gas and the availability of other, cheaper gas resources.
Meanwhile, Shale gas exploration in continental Europe was completed in 2016. As of 2017, there are no plans to resume exploration in the foreseeable future.
US LNG was not globally competitive due to its high production costs. In this respect, the majority of international experts believe that the active LNG plants in the United States will not be used to their full capacity in the coming years. On top of that, only one final investment decision for a new LNG project was made in the United States. in the period from the second half of 2015 to the present. This indicates dwindling interest in US LNG on the part of buyers, especially in countries that can import pipeline gas. For instance, US LNG accounts for less than one percent of the total amount of gas consumed by European countries in the course of this year.
However, there is little doubt that LNG will be the ace of oil markets in less than a decade. Ships in ports are rewarded with lower fees if they use LNG, the European Union (EU) is considering transforming its electricity generating capabilities into LNG-fed power stations, and the main rising markets, like China and India, are already showing a big appetite for LNG.
Statistics at the end of 2017 showed that Chinese natural gas consumption surged throughout the year, up by 19 percent year on year. China is the third largest consumer of natural gas in the world, behind the United States and Russia, and is expected to show the strongest demand growth over the coming decades — propelling it into second place by 2040. As the nation’s industrial and residential sectors pivot away from coal, natural gas demand is going through the roof, with domestic Chinese LNG prices reaching a six-year high last December. As demand continues to rise, Chinese LNG imports have outpaced year-ago levels in every month of 2017. While demand was nearly 20 percent higher in 2017, LNG imports have jumped nearly 50 percent. LNG imports reached an outright record in December, at 4.6 million metric tons.
China National Offshore Oil Corporation (CNOOC) had to rent a convoy of 100 trucks to transport LNG for a very long trajectory to the north of China to satisfy the rising demand there. China is now the second largest importer of LNG globally. Spiking demand has lifted northeast Asian spot LNG prices above $10 one million British Thermal Units (MMBtu).
However, China has the largest shale gas reserves in the world. The nation already satisfies almost two thirds of its gas needs through domestic production. Yet, the country will remain an importer of LNG until 2040 and certainly beyond. Despite the positive outlook, China’s shale industry is lagging behind the stated objectives. The only way to achieve robust growth is to discover a large number of substantial deposits and to considerably reduce production costs in the shale gas sector. Most experts maintain, however, that the Chinese shale industry will not affect the country’s growing dependence on gas imports in any significant manner.
So far, Australia is the leading source of China’s LNG imports, accounting for basically half of receipts this year. Qatar, the world’s leading LNG exporter (for now) is in second place, accounting for 20 percent of deliveries. Malaysia, Indonesia, and Papua New Guinea round out the top five, which account for 90 percent of all imports in 2017.
But Russia is determined not to be left out. Gazprom is making further efforts in this line of business. Documentation is being compiled for the third train of the LNG plant on Sakhalin Island (Sakhalin II project). The company also signed the heads of agreement to set up a joint venture for the purposes of implementing the Baltic LNG project with Shell, Gazprom’s strategic partner. An LNG production, storage, and shipment complex is being built in the neighborhood of the Portovaya compressor station. The management committee was instructed to continue monitoring the prospects of the shale gas and LNG sectors around the globe.
The general picture, therefore, looks as follows: Huge gas demand in China is transforming the outlook for liquefied natural gas in Asia and could see a return to a seller’s market in 2018, making it harder to rein in prices on the east coast. The latest outlook from Deutsche Bank suggests that a long-feared oversupply of LNG in 2018 may not eventuate. It stands as a stark contrast with other, gloomier predictions and would complicate efforts to keep east coast domestic gas prices in check because Queensland exporters will make more from selling gas overseas.
The situation in Japan — the world’s largest LNG market — as well as the wave of infrastructure projects leading into the 2020 Olympics and anti-nuclear sentiment post-Fukushima mean the demand for gas imports should remain “relatively stable.” Additionally, South Korean LNG demand is likely to be supported by a shift away from nuclear energy, promised by President Moon Jae-in, and tightening restrictions on coal power. LNG demand in emerging markets such as Bangladesh, Pakistan, India, and southeast Asia is on the rise.
Only those when can sell their LNG competitively will be able to garner a place among suppliers. And here, geography will play an important role due to transportation expenses. Pipelines will prove to be a winning card in this emerging market.