[NGW Magazine] Asia and the LNG Market

Fresh US exports have combined with the seasonal downturn in demand to soften LNG prices after strong Chinese buying drove them up to 3-year highs over winter but they remain higher than this time last year.

The scale of US exports and the rate of Chinese demand are likely to remain key factors determining market direction as 2020 approaches.

Asian LNG spot prices for June delivery stood at just over $8/mn Btu in the first week of May – up more than 15% from a seasonal low in early April, but down sharply from the $12/mn Btu reached during the winter. A few weeks later, after the oil price rose sharply, June was assessed at $8.80/mn Btu, while the UK NBP hub was assessed at $7.70/mn Btu, offering a thin margin for re-exports.

This trajectory was firmer than last year, when 2016/17 winter prices just topped $10/mn Btu and April levels were around $6/mn Btu. But spot prices are still well below earlier in the decade, when they ranged from $12-20/mn Btu (2011 to 2015).

This underlying rise over the last year is down to firm oil and coal markets, as well as higher-than-expected demand. Asian thermal coal prices are at their highest seasonal level in more than five years, at over $100/ton, driven by unexpectedly strong demand and less supply than expected on world markets. Brent crude – against which much of Asian LNG trade is still priced – has been trading above $80/bbl, up more than a half on a year ago. 

Surging demand 

Prices have enjoyed support from strong Asian demand growth, especially China, which has absorbed much of the additional supply from new capacity brought onstream over the last couple of years; and last year it overtook South Korea as the world’s second-largest LNG importer.

Overall, China saw 2017 imports rise by 46% on 2016. The trend has accelerated further this year, with China’s Q1 imports up 60% on Q1 2017 at 12.4mn metric tons and March LNG imports at 3.25mn mt, up 64% on the year, according to China’s customs department. Most of the demand is to replace coal in power generation, residential and industrial use.

Demand has also been strong in South Korea, Taiwan and southeast Asia, while Bangladesh received its first ever cargo in April. Bangladeshi purchases are expected to rise quickly, replacing domestic output – as long as LNG can stay cost-competitive against coal to avoid switching in power generation.

Although Asia now dominates LNG demand more than ever, Europe has also seen strong buying interest over the last couple of months thanks to very low storage levels following a cold winter. This, along with several pipeline outages and the onset of an extensive maintenance season, has kept prompt prices at the NBP and TTF benchmarks sufficiently elevated to draw cargoes into the region. There were nine arrivals to continental terminals in northwest Europe during the last week of April and the first few days of May alone.

Looking ahead, Sinopec aims to almost triple its LNG receiving capacity by 2023 to a total of 26mn metric tons/yr, up from the current 9mn mt/yr, and there are at least 14 LNG import terminals being planned or developed in south and southeast Asia. This region, along with China, provides the bulk of anticipated growth in LNG demand over the next decade. LNG for bunkering could also see demand rise sharply to 30mn mt/yr by 2030, from negligible levels at the moment. This is spurred on by a 2020 tightening of the marine fuel sulphur cap to a 0.5% maximum, from 3.5% now.    

US exports gain momentum

The additional demand will be met by new export facilities including Dominion Energy’s Cove Point LNG terminal – the second to send US shale gas overseas after Cheniere Energy’s Sabine Pass terminal, which has already sold more than 300 cargoes to 26 countries. Cove Point started production in March and sales deals include one to India’s Gail in the first week of May to supply 12 cargoes over the coming months. Strong netbacks will encourage developers to maximise exports from Cove Point and other terminals coming onstream over the next few years, and they are also encouraging a second wave of export project approvals. This could boost exports beyond current forecasts into the late 2020s.

So far, no US deliveries have been cancelled owing to high US domestic prices relative to international prices, which had been a concern for some buyers. But use of the Panama Canal has risen sharply at up to 65% in Q4 last year, and if netbacks for US Gulf exports to Asia keep rising, there could be a shortage of space by 2019. In April it saw a record three LNG cargoes in one day, while there have been a number of days this year when two cargoes passed through the locks.

Elsewhere, in Africa, Cameroon’s first LNG cargo departed from the Golar LNG-operated Hilli Episeyo floating liquefaction facility on May 17 and is headed for China  – Russian Gazprom is taking all the output – while Russia’s Yamal LNG, in which China is a major investor, has now delivered its second millionth metric ton.

There is also a large volume of new Australian capacity set to come onstream, including the Prelude and Ichthys floating LNG plants, which are now both poised to start. Chevron’s giant 15mn mt/yr Wheatstone facility exported its first cargo late last year and will ramp up capacity this year. Further north, Exxon’s PNG LNG plant is back onstream, after an earthquake caused it to shut in February.

Bigger market

The strong demand and rising supply is reflected in an expanding global market. In its latest annual report released in April, the International Group of Liquefied Natural Gas Importers (GIIGNL) said global LNG imports in 2017 were up by 9.9% compared to 2016 – the highest annual growth rate since 2010, with total trade reaching 289.8mn mt. Thomson Reuters now puts total global LNG imports at 40bn m³/month, up 40% since 2015. 

Asia dominates trade with over three quarters of global volumes, and most of the demand growth occurred there, with LNG imports up by 19.6mn mt in 2017, according to GIIGNL. It said demand from northeast Asian buyers experienced a strong rebound, “which was not a given at the beginning of the year,” and was strongly influenced by energy policy orientation in China, Korea and Taiwan.

The expanding market for LNG is visible in the shipping sector too, where 265 LNG carriers are due to be launched over the 2018-2022 period, according to energy consultancy Westwood.

The rapid rise in volumes, along with more short-term spot and flexible trade, means buyers and sellers are increasingly pricing against gas benchmarks, such as Standard & Poors’ JKM, rather than the JCC crude oil benchmark. The increased flow of cargoes from the Henry-Hub based US to Asia is also helping with this trend. And Australia is using the JKM to calculate netbacks for its LNG exporters. 

Whether or not the long-forecast LNG supply overhang does make its presence felt in the run up to 2020 and send prices back down, is likely to depend to a large extent on the behaviour of the world’s two biggest economies – how much LNG the US can produce and export, offset by the extent to which Chinese demand and imports rise. 

Unless, of course, the Chinese can replicate US success at its own shale gas deposits, which still looks unlikely.