GGP: LNG markets transformation: a shift from a large to fragmented

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.

Liquefied Natural Gas (LNG) became a game changer in international energy portfolio. A fast-evolving transformation has been observed in the market through the last decades of development. In fact, only few years ago, most of observers and experts had expected the markets to grow in off-grid East Asian regions, whereas gas imports in general were supposed to be tight in Europe and North America. Main stakeholders’ concerns covered then the fast-growing demand with a feared supply deficit in the years to come. Thus far, considering the capital-intensive value chain of the refrigeration, transport and regasification, most of the businesses focused then on projects involving economies of scale, large production capacities and long term demand opportunities. Subsequently, liquefaction capacity doubled since the early 2000s and reached 260 million tons of LNG. Together with an increased investment activity, liquefaction costs inflated from $ 4 to 6 per mbtu to  $ 10-15 per ton mostly because of a growth in associated costs (eg. engineering, logistics, fuel supply) for the large scale plants[1]. However, a price collapse occurred since 2014 constitute a serious difficulty for the large-scale liquefaction sites and subsequently creates a difficulty for new regasification projects. What is more, LNG demand growth rates in core East Asian states (Japan, S. Korea and Taiwan) have significantly slowed down in recent years. Most of the long term contracts phase out by 2022-2025, hence volumes of uncommitted LNG seem to increase in time[2]. A sharp decline in LNG price has also been followed by a depreciation of operational costs for logistics, shipping rates and harbour use[3]. A decrease of operational costs together with a supply glut currently stimulate a supply fragmentation across mature markets.  

A market transformation also occurred in the US, where shale gas revolution provided an additional impetus to supply availability. The world’s most powerful economy turned from being an energy importer to become an energy exporter itself.  Currently, new liquefaction technologies, particularly ammonia-based refrigeration which increases liquefaction cost-efficiency, provided new reduction costs opportunity for smaller capacity sites. Thus, an emergence of the US gas exports can provide new opportunities for inter-continental swap agreements. For example, most recent LNG exporting enterprise having obtained export authorisation, namely a joint venture between ExxonMobil, Qatargas and ConocoPhilips entitled Golden pass, creates an opportunity for markets where physical volumes can be contracted in the US even without being shipped to the remote points. The US exports via swap agreements can create a contractual diversification for Europe, even without a direct physical supply with elevated operational costs. The lowest Henri Hub LNG price provides a downside support for the oversupplied markets[4]. Among others, recent Qatargas involvement in Poland can potentially create a ground for such agreements.

Indeed, European states have longtime associated their security of supply with a diversification. However, investments into new infrastructure projects is economically justified for the fast-growing markets, whereas most of the European states observe a stagnation in gas demand. Contrary to the earlier expectations, gas demand fell under 400 bcm by 2015, although the demand figure still topped 530 bcm back in 2010[5]. In this context, overinvestment risks accelerate without a clear long term perspective for the infrastructure projects.

Interestingly, whereas natural gas demand declined in most European states, small-scale LNG engendered an additional impetus to the markets. Small-scale LNG grew almost at 30% in the years between 2011 and 2014 contributing to a decentralised structure of the market. Meanwhile, regasification terminals were oftentimes used below capacity because of a limited demand growth for larger LNG volumes. Instead, a development of small-scale LNG bunkering varying from 7 to 20 thousand tons have been observed in the region, especially in the North sea[6] and Baltic sea[7] areas. Unlike large-scale liquefaction plants, small projects require lesser financial commitments and therefore create an additional cost efficiency for the oversupplied markets. Importantly, some European bunkering facilities plan to utilise contracted volumes in the US by further stimulating a transatlantic gas flow.[8]

It might be worth to note, the LNG bunkering is merely oriented to the maritime transport which will increasingly use LNG propulsions in the near future. In this context, we may observe a similar effect to the mid-20^th century transition from coal to oil products in the transport sector that resulted in a technological boost across the world. Environmental advantages of LNG and its potential contribution to the greenhouse gas emissions abatement (the global maritime sector contributes to approximately 5% of the emissions) can stimulate the transition to LNG propulsions.

Subsequently, unlike the beginning of the century, there is a business adaptation to a more fragmented and small scale markets. Unlike assessments provided a decade ago, currently market players expect decentralised supplies since both liquefaction and transport costs constitute a ground for the new cost-competitiveness calculations. Adding to that, LNG containers for short distance shipment will be increasingly used in addition to the offshore bunkering since the capacity for keeping gas liquefied will grow and hence the supply distances for small LNG volumes will naturally increase. In turn, market fragmentation may then make unnecessary new capital intensive infrastructure in the regions with mature gas demand. While the LNG container and bunkering business is now mostly evolving in Europe, we could expect similar developments in newly emerging Asian markets where regasification infrastructure is still underdeveloped.

Andrei Belyi, University of Eastern Finland

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.