By Larry Persily
(Larry Persily, assistant to the Kenai Peninsula Borough mayor, was invited to participate in an LNG conference in Vancouver, B.C., and prepared this report as part of the borough’s ongoing efforts to share information about global LNG market developments. The conference paid the travel expenses.)
A global oversupply, low prices and market uncertainty have combined to make life difficult for gas producers and liquefied natural gas project developers. Demand for LNG will grow in time but “it is a very competitive market out there right now,” said Deepa Poduval, senior managing director at Black & Veatch Management Consulting.
“Development of new greenfield LNG mega-projects will be challenging worldwide in the near-term as pricing and supply overhang gets played out,” Poduval said at the 19th annual BC Natural Gas Symposium in Vancouver. “There are a large number of sources of potential LNG supply. … It is currently a golden age for LNG buyers.”
An example of changing market conditions are the LNG supply contracts signed by buyers several years ago in anticipation they would need the gas. Japan’s Osaka Gas and also Chubu Electric Power, which is now part of the Japanese LNG-buying consortium called Jera, struck deals in 2012 to buy gas from the Freeport LNG project under construction on the Texas coast, with a scheduled start-up in 2018. But with weaker demand at home, both Jera and Osaka Gas are looking to sell volumes they have under contract from Freeport.
Buyers are becoming sellers, and buyers are also renegotiating for lower prices under their existing contracts, as India’s Petronet did 10 months ago when it succeeded in cutting almost in half what it pays for Qatari LNG by negotiating for new terms under the contract’s oil-price indexation.
In addition to multiple other clients, Poduval during the past 10 years has advised the state of Alaska, providing information to help state officials and the public better understand the economics of LNG projects. She did not offer any comments in her Vancouver presentation on the proposed Alaska LNG development or the state’s effort to take over control of the project from the three major North Slope oil and gas producers.
The state has said its target market is Asia, where Japan, South Korea and China are the big customers.
OVERSUPPLY IS GROWING
Buyers in those countries and elsewhere in the world can count all the new LNG export projects coming online in the past couple of years and in the next few years, especially in Australia and the United States, with even more hopefuls lined up for the next decade. As they count up all the oversupply, they see the opportunity to negotiate for lower prices. While annual global LNG production capacity utilization was about 85 percent 2011-2014, that utilization factor could drop closer to 75 percent by 2020, Poduval said in her Oct. 25 presentation in Vancouver.
Supply capacity, or overcapacity, after 2020 is anyone’s guess. Adding up just the LNG production and export plants proposed for the United States and Canada — not counting East Africa, Russia and other potential suppliers — the total is more than double projected worldwide demand in 2025, said Shelley Milutinovic, chief economist at Canada’s National Energy Board. Most of the proposed projects will not be built if demand does not materialize, and demand projections in some areas are slipping.
Canada’s oil sands projects use a lot of natural gas to create heat, steam and electricity for recovery of the thick bitumen. In January 2016, the energy board predicted oil sands demand for gas would hit 5 billion cubic feet a day by 2040, almost double today’s needs. But, with low oil prices knocking down oil sands investment, the energy board now projects demand might reach 3.5 bcf a day by 2040, Milutinovic said.
Regardless of possibly weaker demand in the oil sands, Canadian gas producers — like Alaska — are looking to the LNG market in Asia. Their historical main customer, the United States, has plenty of gas from its own shale fields. The U.S. has added more than 21 bcf a day of gas production since 2008, equal to 140 percent of total Canadian production and taking away market share from its northern neighbor.
U.S. LOOKS TO EXPORTS
The massive build-up in U.S. gas production has propelled the country into the export business, with four large LNG terminals in various stages of construction in Louisiana and Texas and a smaller project in Maryland. It’s generally not gas producers, however, that are building those projects, but rather what have been called toll-booth operators that charge for their services. The “tolling model” is unique to the United States at this time.
The plant owner does not take the market risk of LNG prices — that’s up to the customer that reserves capacity at the liquefaction plant and has to pay for the capacity even if it doesn’t get used.
The price for most of the LNG delivered from the U.S. terminals will be the cost of the gas on the market, any pipeline charges to deliver the gas to the LNG plant doorstep, the cost of liquefaction including a return to the developer, and the cost of shipping to the customer. “Put together, that became your LNG pricing formula,” Poduval said. It was a much more attractive price for buyers than the traditional LNG contract linked to a barrel of oil on an energy-equivalent basis.
“In many minds, this was a slam dunk,” she said of the contracts based on lower natural gas prices in the United States rather than LNG prices based on $100-a-barrel oil of just a couple of years ago. “You saw people flooding to that first wave of contracts.” Osaka Gas and Chubu Electric were among the buyers caught up in that flood. That’s when oil-linked LNG was selling at $15 per million Btu and higher; the spot-market in Asia is now down to less than half that price.
But as U.S. natural gas prices have risen and oil prices have stayed low, it could cost at times more to buy Gulf Coast LNG linked to U.S. natural gas prices (closer to $9 per million Btu when the cost of the feed gas is around $3) than LNG priced at a percentage of a barrel of oil (around $7 to $8 per million Btu with oil at $50 per barrel). Japanese utilities are re-examining the move to U.S. gas-linked LNG pricing and looking for a mix of pricing variables, Poduval said.
Buyers, particularly in Japan, also have a desire to move away from more rigid, long-term gas supply contracts to shorter-term deals with more flexibility, she said, noting that the LNG-buying venture Jera expects to reduce its volume of LNG supply under long-term contracts by more than 40 percent by 2030.
“LNG pricing may trend toward more decoupling from oil with increasing share of spot trading,” she said in her presentation.
Not just pricing, but the buyers are changing too, Poduval said.
In 2015, Japan, South Korea and Taiwan imported 54 percent of the world’s LNG. By 2020, Black & Veatch estimates that will fall to 40 percent as total demand in the three countries holds flat. China and India are projected to double their LNG imports between 2015 and 2020, with emerging Asian nations to triple their imports. Total demand from China, India and emerging Asian nations could reach almost 80 percent of the annual consumption in Japan, Korea and Taiwan.
Low LNG prices have also attracted many small-market import countries that were uneconomical to serve in the past, helping to build new demand for the fuel.