In looking back at 2015 the year, while very unpleasant for many LNG suppliers, was a most unremarkable year in general.
From the point of view of LNG suppliers, it was a most unpleasant year. Conversely for buyers it was a year of opportunity. The drop in oil prices, which started in 2014, had its predictable and consequential effects on the prices of LNG in global trade and on the price in general of natural gas in Western Europe that pushed down those prices throughout the year.
This change in the market is consistent with the economists’ cliché: “The cure for high prices is high prices; the cure for low prices is low prices.” In this case, the oil and gas industry had become persuaded that high prices were embedded and irreversible. Hence, we have seen what we call the “Era of Exuberance.”
The exuberance was especially visible in the US with the tidal wave of LNG export proposals, all founded on the notion that US natural gas prices were low, international LNG prices were high and that was a permanent fixture in the markets. It wasn’t and isn’t.
The result of the very high prices was exactly as the economists’ saying predicts: significant investment in production resources. Australian projects are the first to enter the market, and are already struggling in an era of tapering LNG demand growth that does not match supply growth.
The result is that the market is being forced to move away from the long term contract environment upon which the early years of the LNG trade were built. The impact of this will be to change the risk profile of the industry and to make prices more volatile and investment risks higher. Some of the investments already made will become stranded with associated losses for the investors and credit providers.
Perhaps the only surprise of the year was the proposed acquisition of BG by Shell. While we have longed thought that BG was a good example of the triumph of over-exuberance over good planning, we were surprised that Shell saw as much value in the acquisition as they seem to. That will be something to watch in 2016. The first hurdle for the deal in 2016 will be shareholder approval, which we expect to happen, but not without some uncertainty.
Then, Shell must rationalize the combination which will be painful.
The cure for low prices is low prices. We expect a price recovery, and one that will be as exaggerated as has been the drop in prices, and perhaps more.
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