America and the Great Gas Glut
An oversupplied market, under-utilisation, and an upcoming surge of LNG. Is there any hope for what was once the fuel of the future?
The past few years has seen demand growth lag behind increases in liquefaction capacity, forcing operators to reduce utilisation rates as markets dry up. AME expects liquefaction capacity to increase at 8% year on year until 2020, easily outpacing demand as growth from major consumers such as Japan and Korea flatline.
It will be up to China, India and other Asian markets to take
up the slack as upcoming projects in Australia and the United States prepare to
unleash another wave of LNG onto already oversupplied markets. With prices 50%
than they were when projects received their final investment decisions (FIDs
many of these future developments will be unable to proceed unless significant
cost savings are made.
The sharp increases in LNG prices between 2010–2014 were due
to the nature of existing LNG contracts. Most LNG contracts between operators
and countries were long term oil linked. The increases in crude during the time
was replicated in LNG exports even though there was no corresponding increase
in gas prices. This spurred the development of additional LNG projects with a
US$10–16/MBtu price floor and ceiling in mind. The subsequent oil price crash
saw the price drop as low as US$4/Mbtu in 2016 and even with AME’s forecasted
2017 average price US$8.8/Mtbu, 50Mtpa of upcoming capacity will be unable to
With much of the predicted additional supply coming online
from American LNG projects, the market is primed for a major change. With
American operators favouring spot or short term contracts over the more
traditional long term oil linked contracts and LNG prices expected to remain
depressed until 2020, AME envisages the following possible scenarios for the
- Status Quo: Existing JCC priced contracts will remain despite buyer complaints and no new contracts are signed as producers adhere to old pricing format. Demands for more flexible contractual agreements allow the US to cater to new demand and expand its market share.
- Buyer’s Market: Pressure from buyers and the low LNG spot prices result in a new form of contract unlinked to the JCC Index. Long term contracts will have price review clauses in anticipation of a future Asian LNG hub, potentially in Shanghai or Tokyo. Existing contract holders continue to pay for their JCC linked contracts but refuse to re-sign unless said revisions are made.
- Deadlock: The oil price recovers to such a level that the large difference between LNG spot and contract prices causes buyers to demand immediate contract renegotiations. Resistance from suppliers who continue demanding JCC linked prices results in lawsuits and litigations. No new contracts except with the US are signed as proceedings continue; however, the spot market increases rapidly to fulfil import needs.
Even if high cost upcoming projects were not to proceed, a
large oversupply will remain. Each scenario anticipates the creation or
movement towards a spot market as cheap US LNG forces existing supplier to
lower their prices.
The main driving force behind this is the shifting demand
market. The low credit ratings of new players such as Egypt will bar them from
raising the capital required for large scale LNG projects. This in turn
excludes them from the long-term contracts traditionally signed between
investors and operators to lock in markets for the proposed supply. Therefore,
AME expects the current trend of average contract lengths and volumes
decreasing year on year to continue as more of these smaller consumers enter
the market. Currently, spot and short term LNG cargoes make up 30% of global
demand and AME forecasts this to increase 2% year on year up to 2020.
The development or movement towards a spot market is expected
to have a ripple effect throughout the LNG market.
- Reduced requirements of development – Previously, many developments were 100% funded with all supply contracted before construction even began. With new entrants unwilling or unable to invest in large upstream enterprises the industry will need to lower it entry standards to continue development.
- Increased efficiency and competition – LNG remains a fledgling industry with many facilities requiring bespoke components and inflexible module arrangements. The move towards smaller LNG facility and regassification stations will lead to a push for industry standardisation, modularity and competition between component suppliers.
- Increased demand from new markets – The removal of LNG’s main barrier to entry, high upfront capital costs will see new demand markets appear. Previously a pipeline constrained area such as south and south-east Asia with high population densities and low or dwindling gas resources can avoid the logistical issues of constructing transcontinental pipelines.