The Giant Gas Glut May Not Be So Giant After All

The looming glut of liquefied natural gas that’s stifling investment and weighing on prices may not be as big as feared, according to Bloomberg New Energy Finance.

Demand growing at the fastest pace since 2011 has shrunk a forecast oversupply of the fuel, Ashish Sethia and Maggie Kuang write in BNEF’s Global LNG Outlook released Wednesday. That means global energy giants that have delayed investments in new projects may need to soon embark on a new slate of multibillion-dollar plants, even as they finish constructing the current wave of developments.

The glut is now looking smaller and ending sooner, according to BNEF’s new analysis. Excess capacity is forecast to peak at 87 million tons in 2020, about 28 percent of total demand. BNEF’s previous outlook in January pegged the maximum at 131 million tons, or 48 percent of demand. And the market is now expected to tip into deficit by 2025 if no new export projects are developed, one year earlier than BNEF’s previous report.

“Oversupply continues to look inevitable over the next several years, despite strong demand growth, but won’t be as serious as previously expected,” Sethia and Kuang wrote in the report. “Demand responding to low prices, slow ramp-up of export projects added in 2016 and delays in commissioning of new supply projects in Australia are contributing factors.”

BNEF also forecast:

  • Global demand will rise 8.8 percent this year to 280 million tons, and reach 479 million by 2030
  • China will become the world’s biggest importer by 2025, with global demand growth from then until 2030 driven by Europe
  • Spot prices will remain around $6 per million British thermal units until mid-2020s if oil prices stay close to current levels
  • North America will be home to 65 percent of the 149 million tons of liquefaction capacity starting up by 2030, none of which has yet taken a financial investment decision

An abundance of natural gas discoveries and a global shift toward cleaner-burning fuels spurred an investment boom in projects over the past decade to export the fuel in liquid form by cooling it to -162 degrees Celsius (-260 Fahrenheit) and shipping it on tankers to markets too far away for pipelines. LNG’s rise is helping natural gas demand growth outpace oil and coal until 2040, according to the International Energy Agency.

The LNG market has already seen the effects of increased supply as projects in Australia and the U.S. begin to come online. Prices for the fuel imported to Japan averaged $8.05 per million Btu this year, down from $16.25 in 2014, according to LNG Japan Corp.

China is the biggest source of new demand, as economic growth and government policies promoting cleaner fuels boost LNG imports, which have surged 45 percent in the first seven months of 2017. BNEF sees China surpassing South Korea to become the world’s second-biggest importer in 2019 and overtaking Japan to become the largest in 2025.

China’s rising gas demand is driven by both industrial users shifting away from oil and coal as well as an overall increase in electricity demand, led by heavy industry, according to BNEF. The nation’s total energy consumption from January to July grew at the fastest pace in four years.

Japan boosted LNG imports by more than 2 million tons during the first half of the year, and delays in nuclear power plant restarts are helping support high demand through 2018. Imports will decline in the long-term as nuclear power replaces demand for gas-fired generation.

South Korea, which had been expected to have flat or declining LNG demand, has reversed course under new President Moon Jae-in, who is prioritizing natural gas and renewable energy over coal and nuclear generation. BNEF now sees the country importing 47.2 million tons in 2025, compared to 31.7 million in the previous forecast.

Emerging markets are also driving new demand, as countries including Pakistan and Bangladesh seek to tap cheaper LNG with floating import terminals, which are quicker to build and require less up-front investment than traditional onshore facilities. The combined demand from emerging buyers is expected to grow from about 3.2 million tons last year to 61 million tons a year by 2030, or about 12 percent of the global market.

All that new demand will delay the glut, but not eliminate it. More than 100 million tons a year of LNG production capacity, more than a third of the size of the current market, is expected to come online through 2020. All that excess capacity has discouraged buyers from signing the long-term contracts that help finance new deals, with just one project, a small export terminal in Mozambique, being sanctioned this year.

BNEF sees few new projects moving ahead before 2020, and since export plants usually take at least five years to build, the market will be tightly balanced by 2024. Analysts with Sanford C. Bernstein & Co. LLC in Hong Kong see even more urgency on the supply side, saying in a separate research note earlier Wednesday that the next LNG project cycle should begin with sanctioning new developments in 2019.

Qatar, the world’s largest LNG exporter, could fill that void. It announced earlier this year it wants to boost production by 30 million tons. The country’s state energy firm, Qatar Petroleum, is less reliant on financial institutions than other energy companies, so it could time its expansion to match when it forecasts the market will need more supply, instead of waiting for customers to sign long-term commitments, Sethia and Kuang said in an interview before the release.

“That would balance the market and prevent spot LNG prices from going very high,” they wrote in the report.

BNEF holds its Future of Energy Summit in London from Sept. 18.

Bloomberg’s Anastacia Dialynas reports on the global liquefied natural gas market.

(Source: Bloomberg)

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