LNG MARKETS
Five Key Drivers of Market Evolution
1. Australian Liquefaction Capacity Around 70% of liquefaction capacity currently under development is
located in Australia. If this capacity is brought to market as planned then Australia is set to overtake Qatar as the world’s largest exporter of LNG by the end of this decade. Australia has an abundance of gas resource, but its weakness is high project costs. Gas is relatively expensive to produce and transport to the liquefaction terminal, not helped by high labour costs and the unprecedented strength of the Australian dollar. Australian projects are currently satisfying incremental demand growth from a gas hungry Asia. But there are two key threats to project development: exports of cheaper gas from the US and a slowdown in Asian demand growth (see 2. and 4. below).
2. US Exports The US is currently awash with relatively low cost unconventional gas.
This has resulted in US gas prices disconnecting from European and Asian prices. Relatively cheap energy has been an important source of support for the ailing US economy, although unconventional gas production costs may rise over time. Uncertainty remains as to whether the US government will approve large volumes of gas exports. The extent to which LNG export licences are granted and the price of gas at Henry Hub will be a key factor influencing the flow of LNG and re-convergence of global prices.
3. Fukushima Fallout Only one of Japan’s 50 nuclear reactors that were closed after the
Fukushima disaster is currently in operation. Given Japan is the world’s largest LNG importer, nuclear closures have been a huge factor driving tightness in the Asian market. While the increase in Japanese demand has been dramatic, its impact will likely diminish over time as nuclear plants come back online. Public opinion has shifted against nuclear energy in Japan but the economy, already suffering from decades of stagnation, is being crippled by the strength of the yen and the cost of imported energy. The pace of return of the remaining nuclear reactors will be a key driver of Asian demand over the next few years.
4. Chinese LNG Demand
If the penetration of gas increased by just 1% in China’s primary energy consumption (from 4 to 5%) it would mean an increase of approximately 27 bcma of gas demand. If that volume were to be met by LNG alone, it would mean an increase in imports of 20 MT per year. The headline numbers are startling, but there is considerable uncertainty over the rate of China’s policy driven switch from coal to gas fired generation, particularly as the economy slows. There are also a range of alternative sources of gas to satisfy Chinese demand, specifically pipeline imports from neighbouring countries (Turkmenistan, Kazakhstan, Burma and Russia) and domestic shale gas resource.
5. Global Growth Another global recession looks increasingly likely as a result of a
slowdown in the rate of Asian growth and political deadlock over European debt crisis resolution. While this is a key source of uncertainty impacting all energy markets, the LNG market is particularly exposed. A sharp fall in Asian growth would have a disproportionate impact on global LNG demand given that Asia is the key driver of incremental demand growth. At the same time LNG supply development is vulnerable to tightening capital constraints from a deterioration of the financial crisis, given that liquefaction projects are very capital intensive.
70 December 2012
the US (awash with unconventional domestic gas production). The rapid evolution of the LNG
market over the next decade is likely to result in price convergence across regional hubs towards variable transport and processing cost differentials. New LNG infrastructure will drive an increasingly dynamic market in traded cargoes and a strengthening of global gas price influence on regional markets. However there is considerable uncertainty as to the path of evolution that the LNG market will follow. The five factors outlined [see BOX 1] will be key to determining that path.
Supply Chain Characteristics While there is a compelling
structural growth story behind LNG, investors are confronted by some specific challenges when committing capital. The LNG supply chain incorporates multiple sources of gas production, liquefaction capacity, cargo shipping, regasification capacity and the flexibility to sell gas at multiple locations. As a result it is inherently more complex than the pipeline gas supply chain, as illustrated in Figure 2. At the core of this complexity
are bespoke contract structures that bridge the supply chain to link production and supply. The interaction between exposures from these contracts and underlying asset flexibility is a key driver of the value and risk of assets within an LNG portfolio.
LNG Portfolio Exposures LNG contracts have historically
been priced using crude oil indexation. This originated from the ability of large importers (e.g. Japan and Korea) to substitute oil and gas for industrial and heating purposes. Crude indexed contract pricing remains dominant today, but the influence of gas hub indexation (mainly US Henry Hub and UK NBP) is becoming increasingly prevalent, particularly in the Atlantic Basin. LNG contract price indexation to crude is typically not complex in itself.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96