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.