Incumbent suppliers throw down a marker to greenfield projects

It’s written in stone for global gas. Oversupplied, years to absorb the surplus, prices depressed. Buyers, sellers and traders have coalesced around a uniform view, that it’s a buyers’ market and only the lowest-cost suppliers can thrive.

Our view is that life will be tough for the next three years, but the worst could be over after 2020.

Then the market should begin the process towards tightening, and LNG prices will rise to incentivise the new supply needed to meet strong demand growth.

The maths supports a bearish view for the next three years, based on our latest long-term outlook. We forecast LNG supply to increase by over 30% by 2020 as US, Australian and Russian projects crank up. About half of the 160 Bcm increase in sales gas will absorbed by demand growth outside Europe.

Despite its status as the world’s most liquid gas market, Europe won’t have room for the other 80 Bcm or anything like it. After accounting for demand growth (15 Bcm) and a decline in indigenous supply (30 Bcm), around 30–40 Bcm looks left on the shelf in 2020.

But difficult markets can spring surprises, and in the last few months there have been some that challenge the consensus.

Positive demand signals

First, demand signals are positive, suggesting upside for our forecasts. Energy and environmental policy in Asia hints at sustained higher demand growth. China is leading the way in improving air quality, with LNG demand up 39% year to May.

South Korea’s new President Moon Jae-in, elected 9th May, has radical plans for the power sector including ending new build nuclear and closing coal-fired plants in favour of gas and renewables.

We reckon this could add 8-10Mt to our base case LNG demand by 2025, more over time. Pakistan is just one of the new high growth markets drawn to LNG by the low carbon intensity of gas and current low prices. Its target is 30Mt of LNG imports by 2022, from 3Mt in 2016.

There’s momentum behind improving air quality in Asia that could spread into other markets.

Contract terms

Second, restrictive LNG contract terms are under legal scrutiny. Japan's Free Trade Commission (JFTC) said in late June that clauses preventing resale of FOB LNG cargoes are likely to be anticompetitive. The ruling on contract ‘destination clauses’ may allow buyers to resell in the open market. This is the thin end of the wedge, and potentially bullish for legacy Japanese buyers. Many are long on gas in a declining domestic market. Change, should it come, would give some flexibility around take-or-pay contracts, provide freedom to sell elsewhere, and de-risk potential financial liability. It might also result in less LNG going to Japan and more for the market to absorb.

LNG into Europe

Third, traditional European pipeline suppliers are moving to protect market share against the influx of LNG into Europe. The focus has been on Russia, the biggest supplier, which is building two big new pipelines (Turkstream, Nordstream 2). But, Norway (Troll West) and Algeria (frontloading Hassi R’Mel) number 2 and 3 supplier respectively, are also making noises about investing in capacity. Both are looking to accelerate sales volumes of low-cost, competitive gas and boosting NPV by tapping into existing infrastructure. Next decade both countries will face an inevitable shift to higher cost resource.

Qatar's market share

Fourth, Qatar has signalled its intention to hold its undisputed position as global LNG’s low cost big shot. The latest capacity expansion plans are bigger than expected, increasing LNG capacity from 78 mmtpa to 100 mmtpa bolstering Qatar’s market share at around 20%. This is double the previous objective and fends off the development of higher-cost competition, just at a time when new demand is emerging.

The consensus on oversupply through 2020 does look set in stone, even with demand picking up.

But the jockeying for market share among the big incumbent gas suppliers into the early years of next decade casts a shadow over the timing of market tightening and price recovery for LNG. Will the momentum behind pro–gas and LNG policies in Asia be sufficient to keep new LNG supply projects in Mozambique and USA on track?