Long Term Supply Concerns
September 2017
Asia’s LNG imports continued to grow in June 2017, in part pushed by increasing LNG supply from Pacific Rim countries, particularly from Australia. Japan’s liquefied gas imports rose by 3.6% YoY in July 2017, according to data released by the country’s Ministry of Finance. The world’s largest consumer of LNG imported 6.82Mt last month, compared to 6.58Mt in July 2016.

Previously Japan had reported a decline in June LNG imports after posting a rise for four straight months. The increase in Japanese purchases has affected prices. Spot cargoes remained in the US$5-6/MBtu range for the last three months – a reflection of weaker demand during the northern hemisphere summer season – but in August we saw signs of price inflation as Asian average spot LNG prices for October delivery rose to US$6.30/MBtu.

The indication of higher prices did not affect Malaysia’s Petronas announcement that it would not proceed with its Pacific Northwest LNG project—part of a proposed US$27 billion investment in British Columbia natural gas production, processing, and shipping. While the project had significant potential when first announced, market conditions have been weakening since and the cancellation didn’t come as a surprise. Our initial estimations put the combined costs of gas transmission from the Montney and Horn River formations to the coast, liquefaction, and shipping to Asia at around US$6-7/MBtu, without any considerations for gas feedstock expenses. These costs compare unfavourably to the price LNG cargoes are trading in Japan’s spot markets. Petronas’ cancellation followed Shell’s Prince Rupert LNG, which now puts the spotlight on other neighbouring Canadian project proposals such as Chevron’s Kitimat LNG and Shell’s other project, Canada LNG.

Delays and reductions in investments in new supply projects in recent years, caused by the low-price environment, have been a source of concern in the industry – even as the current supply glut is expected to worsen during 2018-19. The concern arises from the long lead time between a final investment decision and first LNG cargo delivery – typically more than five years – and the steady pace of LNG trade growth seen in the last two years. Thus, Anadarko’s announcement in July that it had finalized agreements with the Government of Mozambique which would allow carrying forward the 12Mtpa LNG project in northern Mozambique is a sign that some supply projects are still able to reach the economic thresholds to drive long-term supply growth.

The recent decision by ENI to invest in the 3.4Mtpa Coral South LNG project in Mozambique was equally significant. The Coral South LNG project is expected to start production in 2022, which coincides with the year the current supply glut is expected to ease. Coral South will also be the third floating LNG (FLNG) project to be sanctioned. The technology is supposed to be used widely in the future due to advantages such as shorter construction period, no need for transmission pipelines, the ability to relocate the liquefaction plant after field depletion, and other environmental reasons (no footprint and near shore impacts, thus easier issuance of environmental licenses).

In fact, there are some other FLNG projects reaching an investment decision in African countries, such as Equatorial Guinea and Cameroon. FLNG could potentially enable several smaller scale supply projects just as the floating storage regasification units (FSRU) which has boosted the number of smaller countries importing LNG.

Qatar announced that it would lift the moratorium on new developments and expand its production capacity to 100 million tonnes by 2024. We consider the 100Mt production capacity target realistic since Qatar has already exported over 79Mt in 2016, exceeding its combined nameplate capacity of 77Mt. The timing of the announcement may have been related to Iran’s announcement that it will develop its South Pars field, which is geologically connected to Qatar’s North Field. But what matters is not whether the target production is achievable, but the fact that Qatar, the world’s most cost competitive supplier, is once again working to boost production since the 2005 moratorium was put in place. This move is desirable from the perspective of securing cheap long-term LNG supply, but will be a concern for suppliers expecting to see a tighter supply-demand balance in the early 2020s.