Driving buyer-supplier decisions in LNG procurement

Rishi Doshi's picture
Rishi Doshi, Research Analyst, GEP Worldwide
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Demand for Liquefied Natural Gas (LNG) in Asian countries like Taiwan, Korea, China, India, Pakistan, Sri Lanka, etc. has nearly doubled over the past four years, from 17.7 million tonnes in 2013 to 33.2 million tonnes in 2017. This spike in the requirement for the cleanest fossil fuel has been primarily been supported by the Chinese government’s reinvigorating efforts at combating air pollution.

In Japan, the country’s rampant nuclear shortfalls have forced the nation to rely strongly on LNG for sustaining its power generation capacity. About 70% of this Asian demand in 2016 was supplied by Qatari moguls that pump out close to 77 million tonnes of LNG per year, in comparison to Australia’s 24.5 million and USA’s 16 million.

However, Australia is set to trump the Arab country’s supremacy in the Asia-Pacific region by 2019 with a consolidated LNG output of 84.5 million tonnes. This surge in the Pacific nation’s production capacity is mainly driven by a $200 billion investment by global oil firms like Chevron, Shell and Exxon Mobil which focusses on the development of eight plants in Australia.

LNG is typically shipped using Floating Storage Regasification Units (FSRUs) that liquefy the produced gas and re-gasify the fuel on arrival at the destination terminal. LNG logistics include a wide array of expenses, everything from liquefaction costs, carrier fees and regasification costs to transit charges and constitutes nearly 70% of LNG’s end-user price. While shipping costs are close to US$2/mmBtu for cargo from Qatar to Asia, it takes only US$1/mmBtu to transport LNG from Australia to Asia.

The transit time of LNG vessels from Australia to North Asia is also nearly halved to only 10 days, compared to the 21 days that it takes Qatari suppliers to reach the same destination. Thus, closer proximity to key markets like Japan, Taiwan and China allows Australian suppliers to capitalize on the shorter shipping routes and lends them an opportunity to lower their logistics expenses.

Since more than half of LNG’s production cost is decided by transportation and distribution expenses, it is highly likely that Australian LNG will strive to capture significant market share through cost competitiveness and faster delivery in Asia-Pacific in the coming years. This has already been indicated by the dwindling LNG export volumes from Qatar to Asia since 2013, while Australian LNG has seen a meteoric rise in supply to Asian markets.

Procurement and Sourcing Impact: With Australia and even Russia subsuming a sizable market in Asia, Qatari suppliers are expected to be subjected to strong market competition and might be forced to shift focus westwards to supply LNG to Spain, Britain and the rest of Europe which is highly dependent on this fossil fuel.

Also, when American LNG comes on stream and global supply shifts higher than the demand, Europe is forecasted to possess and increased a degree of buyer power with options of supply lying with Russia, USA and Qatar. The economics of LNG exports and imports is thereby expected to trickle down to logistics and be governed majorly by shipping costs across various sea routes.

LNG import-export relationships have been traditionally governed by long-term (15-20 years) contracts with an oil-based pricing mechanism. However, the emergence of a global supplier base with the introduction of new export countries like Australia and USA has triggered a change in the overall dynamics of the LNG market. An increasing number of buyers are deviating from long-term contracts that are typically controlled by market-based pricing to adopt a more robust spot shipping strategy.

This has been indicated by the exponential growth of LNG charter rates, increasing from US$10-12,000 in 2013 to close to US$30,000 in 2017. The burgeoning influence of logistics and distribution costs on LNG supply across the globe is driving this economic shift in the procurement models of the world’s predominant buyers.

Would you like to hear more about the evolving gas and LNG trading dynamics? Register now for the 2018 Gastech Exhibition and Conference taking place 17-20 September in Barcelona to hear industry experts discuss the latest developments and their forecasts of the market dynamics. 

Image courtesy of GEP Worldwide