(EnergyAsia, November 27 2014, Thursday) — With liquefied natural gas (LNG) supply growth outpacing demand, Asian buyers have the upper hand for now although a blast of cold from unpredictable weather conditions could easily spike prices, said consultant Wood Mackenzie.
Riding the downtrend, according to the International Energy Agency (IEA), Asian buyers are digging in with their demand for an overhaul of the LNG pricing formula as the market’s weakness could be protracted on account of weak global demand, rising supply and depressed oil prices.
Gavin Thompson, Wood Mackenzie’s Head of Asia Pacific Gas & Power Research, said he expects Asia’s LNG spot market to continue “to loosen this winter” to the delight of buyers, marking a reversal of previous years’ trends of high prices and tight supply.
“It turned in favour of buyers in summer this year, with the growth of Pacific LNG supply outpacing that of demand. Assuming normal winter weather patterns in the region from October to March, we expect that trend to continue this winter too,” he said.
“Storage inventory levels remain high, due primarily to mild weather through the past year. We now forecast that Pacific LNG imports will only grow by a modest one million tonnes during the traditional peak winter season.
“LNG supply from within the region, on the other hand, will be three million tonnes higher this winter than last mainly due to new volumes from Papua New Guinea, with minimal supply disruptions expected.
“Due to this comfortable demand-supply outlook, we expect Pacific LNG prices to be notably softer compared to the same period last year. With global oil prices also expected to remain soft through this period, LNG prices will struggle to match previous year highs.”
His colleague, Noel Tomnay, who heads the firm’s global gas research unit, said the biggest risk to supply will come from a cold winter, not Russia.
“Our estimates suggest that colder temperatures in northeast Asia could increase LNG demand by seven million tonnes, requiring additional sources of supply. Most of this additional demand would need to be served by increased diversions from Europe, as Asia will struggle to access sufficient Pacific LNG supply,” said Mr Tomnay.
“This has the potential to transform a currently loosening market into the tightest Pacific market we’ve seen yet. With growing regasification capacity in north China supporting higher Asian winter LNG demand potential, this is now a risk that is getting bigger.”
An increase in Asian LNG demand during the winter will mean Europe will have less to import.
However, as northwestern Europe has insufficient storage inventories, a cold winter will force it into a greater reliance on Russian gas. If the Russian-Western dispute over Ukraine worsens, European buyers of Russian would come under increased pressure to secure additional LNG cargoes to offset the potential loss of Russian supply.
According to Wood Mackenzie, the worst-case scenario combining cold winter weather in both Asia and Europe, and disruption of Russian piped gas through Ukraine would create an additional demand of 12 million tonnes of LNG. Europe alone would account for five million tonnes of that additional demand.
In this ‘perfect storm’ that includes limited global LNG supply availability, Wood Mackenzie said some of that demand, including in Asia, will not be met.
In a separate report, the IEA said last year’s average US$12 million BTU gap in natural gas prices between Asia and the US is unlikely to be repeated as a result of the recent weakness in global energy markets. Asia paid between US$15 and US$18 per million BTU for their LNG cargoes, while North American consumers enjoyed cheap energy from mostly paying just US$3 to US$4.
The IEA said Asian buyers are no longer ready to pay record oil-linked prices that harm their economies, with consequences such as Japan developing a trade deficit in 2011, a situation unseen in the previous 31 years.
Gas supplies have also emerged from new sources, with many of the new players prepared to offer cheaper and more flexible terms.
“As demand in Asia grows faster than in other regions, Asian countries think they should get better terms and are now considering developing co-operation among buyers,” said the IEA’s medium-term gas forecast to 2019.
“Additionally, companies are looking for different pricing mechanisms and more flexibility in the delivery terms. Signing up for cheaper hub-priced LNG from the US seems very attractive at current price levels.”
Not all suppliers agree that market conditions have changed so radically.
As new greenfield projects are increasingly expensive, investors will need to secure revenues through long-term contracts preferably linked to oil prices.
As of May 2014, the IEA said companies were building around 150 billion cubic metres per year of liquefaction capacity, with half of that in Australia at a record average cost of almost US$4,000 per ton including upstream and LNG development.
The agency said it expects the global LNG trade to rise from 322 billion cubic metres (bcm) in 2013 to 450 bcm by 2019, rising about 40% faster than that of inter-regional pipeline trade. Global LNG consumption edged up 1.2% to reach 3.5 trillion cubic metres last year.
“More LNG will be needed thereafter, and given the five-year construction period that any greenfield LNG projects usually require, decisions must be taken now for supply arriving to the markets by 2020. Although many LNG projects are at the planning stage, actually very few final investment decisions (FIDs) have been taken since mid-2012,” said the IEA.