Editorial: LNG: seeking a new market equilibrium [LNG Condensed]
The near certainty that LNG supplies will be reliable and cheap, along with increasing concern over climate change, is enabling more ambitious climate change targets to be adopted, particularly in heavily coal dependent economies.
Take, for example, China’s announcement that it will aim for carbon neutrality by 2060. China consumed 82 exajoules (EJ) of the 158 EJ of coal use globally in 2019. The goals of the Paris Treaty on Climate Change cannot be met without China, and China cannot achieve carbon neutrality without a huge switch from coal-fired generation to renewables, nuclear and gas, an increasing proportion of which will be imported both by pipeline and as LNG.
Even in the short term, despite the impact of the coronavirus pandemic, China’s LNG demand is proving resilient. Chinese LNG imports were up 10% year on year during the first eight months of the year, according to customs department data.
European shift
Exhibit 2 is Poland, which announced new energy sector targets in September to accelerate its phase out of coal. Again, coal-to-gas switching is a key element of the strategy, which, like China, also depends on accelerated renewables construction, alongside the country’s first nuclear reactors. Poland is preparing to invest in an expansion of its Swinoujscie LNG terminal and build a second import facility with 4.5bn m3 of capacity in Gdansk.
This comes as Germany’s LNG import plans continue to pick up momentum with utility Uniper starting a process for binding bids for capacity at its planned LNG terminal at Wilhelmshaven. With nuclear also being phased out, coal-to-gas switching, while renewable energy capacities are scaled up, is a key element of Germany’s energy transition plans.
All in all, according to data from consultants Wood Mackenzie, global regasification capacity under construction is expected to hit a 10-year high at 144mn metric tons/year this year. This includes 33 new terminals under construction, adding 92.8mn mt/yr, and a further 51.0mn mt/yr of capacity which is set to be added at existing terminals.
China is leading the capacity additions, accounting for over a third of total capacity, including 22.4mn mt/yr at 10 new terminals, according to WoodMac.
Investment cycle
At the same time, the supply side of the market is adjusting, although under duress in what is a painful time for producers and project developers. Postponements are more common than cancellations, an expression of long-term confidence in the LNG market, and delays in bringing new capacity to market will serve to rebalance the market.
Investment in LNG on both the supply and demand sides is lumpy because LNG plants and terminals require significant amounts of upfront capital for long-life infrastructure, which tends to lead to a boom-bust cycle. Covid-19 has made that process even harder for project developers to manage, but the market is responding well in terms of accelerated demand-side investment and an inevitable slowdown in supply-side spending.
However, there will be long-term effects. Those producers, with firm political backing and support, able to invest through the down cycle are likely to emerge as stronger market players over the next decade. This, in theory, will favour Russian and Qatari LNG over and above, for example, US LNG and the oil and gas majors, which are more likely to respond to market signals in terms of new investment.
Yet even here the drivers of change favour LNG. A number of oil majors – Shell, BP and Total – have announced new energy transition strategies in which LNG takes centre stage, displacing oil, while they also increase the proportion of their investment spend dedicated to renewable energy and the power sector. Total plans to double its LNG sales over the next decade to 70mn mt/yr.
The bottom line is that oil and coal together provide 60% of the world’s primary energy supply. National and company level plans to decarbonise have to start by switching to cleaner burning gas, creating a huge space in the energy transition for the LNG industry to occupy.