The fabled curse “may you live in interesting times” seems to apply to the LNG industry each year. How “interesting” will 2019 be?
The macro picture is bullish, with large amounts of LNG coming online and this will continue over the next eighteen months. Australia has recently overtaken Qatar as the largest producer of LNG and the Corpus Christi project in Texas has recently announced its first export; the first of the wave of new US LNG production hitting the market. Fears that the US wave would drown the market, and parties who had invested in liquefaction capacity in the US would be trapped in “long positions” have now dissipated, and in the last year most commentators have reached consensus that more liquefaction is needed to meet booming demand in China, India, Pakistan and new markets, particularly in South East Asia.
As a result, new greenfield projects such as Mozambique LNG, LNG Canada, and brownfield expansions such as Papua LNG and expansions of some of the US liquefaction projects have either reached FID recently or are expected to in 2019, the first new liquefaction to be given approval in the last three or four years.
So what are we likely to see in 2019? Looking at gas markets, one theme is deregulation: established markets for LNG such as Japan and Korea have been undertaking a measure of deregulation over the last few years and this continues to have an influence on how gas is contracted for in those markets:
The industry should take a lot of credit for stimulating new demand for LNG, particularly in the years when there was a concern that the market was long. The shipping industry is now rolling out LNG as a marine bunkering fuel, with LNG bunkering barges in operation or on order for many of the main bunkering ports around the world, including Singapore.
We are also seeing a rise in interest in delivering LNG as a liquid fuel in road tankers directly to customers, and significant interest in smaller scale shipping solutions to deliver LNG in small packets to archipelagic communities in this region. This is a business that China has to lead the way on for over fifteen years, particularly with domestically produced LNG. Significantly, Indonesia’s policy of only consuming domestically produced LNG has, in our view, constrained the interest from international LNG players in these types of projects amongst the islands of Indonesia.
We expect to see greater growth of small-scale LNG fuelled generation as an element of renewable power solutions. Whilst this is unlikely to have a significant impact on volumes of LNG consumption, it nonetheless shows how the LNG industry continues to open up to new participants.
Larger scale gas-to-power projects have been heralded as one way to stimulate demand for LNG and many have been proposed. A few have reached FID, but in a number of cases, the complexity of developing these complex projects in countries that are often under-developed has proved to be a challenge. We wonder whether there will be a reassessment of a number of these projects if sponsors are able to access less challenging ways to sell LNG in a more balanced global LNG market.
2019 is going to see new liquefaction coming onstream at an unprecedented rate. Some of the new supply coming onto the market will enjoy much greater destination flexibility than has traditionally been the case. This will have a number of impacts: destination flexible cargoes will “lubricate” optimisation of LNG trades, and the availability of destination free terms has increased the pressure from buyers and regulators such as the Japanese Fair Trade Commission to challenge existing practices regarding destination restrictions.
In 2019 we can expect greater moves toward deregulation in key markets, with consequential impacts on the terms that LNG and gas are bought and sold; a continuing search for new markets for LNG, both in terms of geographical markets opening up for LNG sellers, and new ways of consuming LNG, such as maritime bunkers, LNG as a liquid fuel, small-scale LNG projects. As ever, we live in interesting times, but there are many opportunities ahead.
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