Global LNG Supply may not increase as much as planned
Web Posted on : Sun, 08 Nov 2015
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The three major global projects that have recently been completed have faced some difficulties. The 8.5mtpa Queensland Curtis LNG project in Australia, was completed in 2015 after considerable delays. A 4.7mtpa Algerian facility completed in 2014 is only producing at 50% of capacity due to a lack of feedstock. A new 6.9mtpa facility in Papua New Guinea was completed in 2014 and a new 2mtpa facility started production in Indonesia in 2015.
There are currently 16 major LNG projects already under construction, which should add around 12mtpa in 2016 and 33mtpa in 2017. Australia and the US are adding the largest amount of capacity. Australia made large discoveries of natural gas in the 2000s and invested heavily in LNG—USD180bn of LNG projects are currently under construction with total capacity of 60mtpa. The US is currently building 50mtpa following its shale gas revolution (see our previous report, US shale gas revolution is no game changer for Qatar), which has transformed the US from a hefty importer of natural gas to a soon-to-be exporter. As a result, a number of plants that were designed as LNG importing terminals are being converted to export facilities. Some additional LNG capacity is also expected from Malaysia (4.8mtpa in 2015-16) and Russia (16.5mtpa in 2017-19).
The plug is unlikely to be pulled on projects that are under construction. They already have long-term commitments from buyers for the sale of LNG and their breakeven oil price is estimated at around USD50/barrel, just about manageable at present. However, we expect there to be some slippage in the completion date of these projects due to their complexity, rising costs as well as permitting and regulatory issues.
In addition to under construction projects, there are numerous projects being considered, including around 600mtpa of proposed projects, around 260mtpa of which are in the initial engineering and design phase. However, in the current environment, very few of this massive volume of projects is likely to be considered viable for a number of reasons. First, the breakeven oil prices on these projects is estimated at around USD70-80/barrel, well above current market levels. Second, China is expected to be the main source of future demand growth for LNG and concerns about its economy slowing down (see our report, The global implications of China’s devaluation) may undermine the global LNG demand outlook. Third, construction costs more than doubled in 2007-13 compared with 2000-06, with higher labour costs being a particular issue in the US oil and gas sector. Fourth, the large amount of new capacity that is already under construction seems to point to a likely oversupplied market until at least 2020, discouraging the approval of projects that are currently under consideration. Fifth, buyers are reluctant to enter into long-term contracts in the current market environment as spot LNG prices are low and falling. Without long-term gas sales contracts in place, large-scale LNG projects are highly unlikely to be able to put the financing in place, making it hard to get these projects off the ground.
Some companies have already cancelled projects. For example, Royal Dutch Shell cancelled its USD20bn Arrow project in Australia at the beginning of 2015 and Woodside has pushed back a decision on its Browse floating LNG project in Australia from 2014 to 2016 at least. In this environment, we expect few new LNG projects to be initiated in the short-term. LNG projects have a construction period of 4-6 years. Therefore, a delay in initiating new projects over the next year or two, should lead to tighter LNG markets in the early 2020s.
To summarise, LNG capacity is expected to increase sharply up to around 2020 leading to a glut in supply, depressing prices. Qatar is in a strong position versus new producers thanks to its competitive pricing power and the long-term contracts it already has in place. In the longer-term (say, by the early 2020s), the current pause in the initiation of new LNG projects could to lead to a tightening of the market as demand catches up.