The latest report on the status of the LNG industry from GIIGNL (the International Group of LNG Importers) describes 2013 as a “transition year” – marked by the emergence of new trade patterns. As in 2012, trade volumes were pretty much flat because of supply constraints rather than a lack of latent demand. This led to continuing market tightness, which GIIGNL expects to persist until 2016, when a new wave of supply will come from mainly Australia and later the US. Meanwhile, growing expectations that the US will become a large-scale exporter of LNG continue to impact contracting strategies, putting pressure on oil-linked pricing.
Over the past two decades, LNG trade has been growing rapidly, with most years showing an impressive increase on the previous year. Not so in 2012 and 2013, according to the latest data to be published by GIIGNL. While LNG trade fell by 1.9% in 2012, to 236.2 million tonnes, in 2013 it edged upward very slightly, by just 0.3% to 236.9 million tonnes, remaining below the level of 2011.
Supply constraints: This was partly because little new supply came on stream. In 2012, only Pluto, a single-train 4.3 mtpa plant in Australia, started up, while in 2013, again only one new train came on stream, this time at the 5.2 mtpa Angola LNG project. So while global liquefaction capacity rose to 286 mtpa, the utilisation of that capacity was 83%. The number of LNG-exporting countries at the year-end was 17. By far the largest exporter was Qatar, producing 78.02 million tonnes, 33% of the global market.
GIIGNL’s President, Domenico Dispenza, attributes the stagnation in output to “unplanned outages in Angola, Norway and Nigeria, political unrest in some countries and the shortfall in feed gas, particularly in Egypt as priority was given to domestic consumption”.
This curtailment of production also had an impact on the availability of flexible LNG, a consequence of which was little growth in the volumes of spot and short-term trade (defined as contracts with terms of four years or less). Nevertheless, even the small growth that did take place meant that spot and short-term trade accounted for more than a quarter of the total for the first time, rising to 65 million tonnes, a 27.4% share.
Robust demand growth: Demand for LNG remained strong in Asia Pacific. China’s emphasis on using more gas in place of coal continued to drive demand sharply higher to 170 Bcm, 18% up in 2012; LNG imports rose by 27% to 18.6 mtpa. In South Korea, the closure of some nuclear power stations led to a 9.8% rise to 40.4 mtpa. Japan’s nuclear woes have seen its LNG imports rise sharply since the accident at Fukushima in 2011, though in 2013 demand edged downwards by 0.1%, as high prices and the yen devaluation shifted the energy mix towards other fuels.
LNG imports in 2013 were down 0.3% on 2012 because of supply constraints. (Source: GIIGNL)
Demand also increased strongly in Latin America, mainly due to the effects of weather. Incremental volumes imported into Argentina (+1.4 million tonnes), Brazil (+1.5 million tonnes) and Mexico (+2.2 million tonnes) offset decreases in the USA and Canada, contributing to increasing imports into the Americas by 17.1%.
Europe, says Dispenza, “remained the swing provider to the world’s LNG market”, with demand remaining depressed and with the utilisation rate of regasification terminals “at a historical low”. These factors prompted European players to continue with innovative transactions – such as re-loadings, two-port loadings, and ship-to-ship transfers – in the search for business, while developing new markets for LNG as a transportation fuel.
Record prices: Inevitably, the combination of flat production and growing latent demand in most regions pushed prices upwards – to record highs in Asia Pacific in the first quarter.
Commenting on the supply-demand balance over the medium to long term, Dispenza writes: “Strong demand in Asia is expected to continue, especially in emerging markets, driven among others by China, with 4 terminalling projects under construction with a combined capacity of 12 mtpa. Worldwide, more than 25 new terminals or terminal expansions are under construction with possible start-up by the end of 2015.
“The pace of nuclear re-starts in Japan and the role of nuclear in South Korea, factors not yet fully determined, will have a crucial impact on other LNG markets, in Asia and elsewhere.
“On the supply side, markets should remain tight until 2016, depending mostly on the completion performance of the Australian projects. From 2017 onwards we should expect a steep LNG supply growth in several regions – North America, Australia, East Africa and Russia – competing for the demand growth in Asia, South America and possibly the Middle East.”
As in 2012, the latest GIIGNL report puts a lot of emphasis on the impact that proposed US LNG export projects are having on buyers’ thinking when it comes to contracting strategies.
Diversification, diversification: “New supply sources will bring more diversification and enhanced security of supply for buyers and could lead to a rebalancing of market forces,” writes Dispenza.
“In Asia, the keyword is diversification: diversification of supply sources and of pricing, with indexation being viewed as a solution for high price levels. The expected new wave of exports from the US may put pressure on oil-linked pricing, though the latter remains key to the development of many new high-cost projects. At the time of this writing, new LNG capacities from Australia and the US have already largely been underwritten. This does not apply yet for Canada and East Africa.”
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