New wave of LNG supply to create fresh opportunities

Surplus product is encouraging sellers to consider diversifying into the floating regasification, small-scale and marine bunkering to boost demand

Oversupply looks set to dog the LNG industry for the next five years with a consequent need to create fresh demand to absorb surplus product — and this could see new opportunities for shipping.

Top of the list are floating storage and regasification units (FSRUs), which were mentioned by nearly every speaker at CWC’s World LNG Conference in Barcelona last week. Small-scale LNG, gas-to-power projects, and marine bunkering also got more than their usual airplay.

But what was most noticeable at this end of year meeting, which serves as something of an annual barometer for the industry, were the proclamations by LNG producers and sellers that they need to take positions in business areas they might not previously have looked at, in an attempt to find new buyers.

“FSRUs are the solution,” Total’s president for gas Laurent Vivier told the audience. “We need players
upstream to move downstream. We need today to do our share in developing this demand and invest in infrastructure.”

LNG is already a buyer’s market but the new wave of incoming supply — much of it from the US — is set to be a game changer.

Global LNG production for 2016 looks set to top out at about 264 million tonnes.

A further 110 million tonnes per annum (mtpa) of liquefaction capacity is already under construction, part of a 720 mtpa of planned LNG projects worldwide. This new LNG will start coming onstream next year but in 2018 US producers alone are scheduled to bring 11 new production trains online.

Hiroki Sato, senior executive vice-president and chief fuel transactions officer for trader JERA, said in 2018 some 50 to 70 mtpa will come onto the market with “no permanent destination”, allowing it to be traded globally.

By 2025, LNG production is set to reach 380 million tonnes.

Speakers at the Spanish gathering largely agreed that they expect the market to return to balance from 2022 onwards as this supply is absorbed and new demand starts to kick in.

However, in the interim this near doubling of production is expected to fundamentally change the way the LNG industry operates.

Traders who are already much more active players in the sector are flagging up what they believe will be a surge in LNG spot trading, with one claiming this could rise from current levels of about 25% of the market volumes to up to 50%, or about 150 to 160 mtpa by 2020.

The definition between buyers, traders and sellers is beginning to blur with players moving into each other’s domains.

Speakers from Egypt, Malaysia and Indonesia, all originally LNG producers, spoke of their new dual roles as importers and exporters and the potential opportunities this could create.

There was talk of a move to a more commoditised trading market and the need for more collaboration between market players.

The shifts are bringing calls for a new business model in the industry that will need more flexible contracts, and new pricing mechanisms as short-term and spot trading grows.

Petronet managing director and chief executive Prabhat Singh said there is a “huge need” to optimise on the miles that LNG travels, detailing that cargo swaps with US shipments destined for India could offer a potential annual saving of $1.5bn.

Eric Bensaude, managing director, commercial operations and asset optimisation, for the US’ newest producer Cheniere Energy, said that Asian utilities and Far East trading houses have contracted for about half of the 60 mtpa of the US LNG production sanctioned to date. But he told delegates that of the three mtpa exported from Cheniere’s two trains to date, 45% has been delivered to South America and the Middle East. “It shows that the flexibility is working,” he said.

“Demand patterns are changing — potentially a huge opportunity for LNG,” BP chief operating officer for gas Jonty Shepard told the audience.

So, in 2017 the LNG industry is likely to see some fairly serious muscle making a move into the floating regasification space as majors and producers look to find new buyers for their surplus product.

Total has already shown its hand by investing in an FSRU for the Ivory Coast and others are likely to follow.

The moves on small-scale LNG might be less dramatic but some big names are already hard at work on it. Shell executive vice-president for gas and energy marketing Steve Hill was quick to flag up the company’s early mover status after sanctioning a first project in Gibraltar.

LNG bunkering is also starting to drift onto the radar of some of the industry’s key players. Bomin Linde LNG chief executive Mahinde Abeynaike believes this sector — which currently consumes just 250,000 tonnes of LNG, may account for one mtpa by 2020 but has the potential to be “huge” by 2030.

Just as supply prepares to flood the market, the industry is also being urged to invest in the next wave of LNG production in an environment where finance is limited. With these needed to come online after the anticipated market rebalancing from 2022, final investment decisions need to be made soon.

 

Article courtesy of Lucy Hine, TradeWinds

© The CWC Group 2017