(EnergyAsia, October 28 2015, Wednesday) — Consultant Wood Mackenzie has more bad news for the already battered liquefied natural gas (LNG) markets: prices will be further tested by a deluge of new supply amid weak demand in China.
In a report prepared for Gastech 2015 in Singapore, the UK firm said it expects producers to unleash 130 million tonnes/year of new capacity over the next five years at the same time that China’s energy demand growth will be faltering.
The silver lining is that lower spot prices will unlock new demand, create new markets and reduce the dependence on coal, particularly in generating electricity in the US. power.
“The LNG market is facing another oversupply which is likely to be deeper and will persist for some years. Prices in Asia will be lower than in Europe, and at their worst, between 2017-19, while prices in Europe will not reach a low point until 2020,” said Noel Tomnay, Wood Mackenzie’s head of global gas and LNG research.
“The last LNG oversupply between 2008-10 came about when Qatar ramped up its LNG output and the market had to absorb 50 million tonnes/year of new LNG, at a time when demand growth had slowed.”
As a result, Mr Tomnay said Europe’s gas spot prices fell below US$4 per million British Thermal Unit (US$/mmbtu) through the summer of 2009. But with no demand out of Asia, those prices were still enough to attract LNG cargoes to Europe, including from Australia.
He predicts the current LNG glut will likely be longer and deeper, pushing prices in Asia below Europe’s for at least two years from 2017 to 2019. European LNG prices will fall further to reach a new low in 2020.
China will be central to the question of how much lower LNG prices can fall, according to the Wood Mackenzie report, “Global gas prices – what will set the floor?”
While lower prices will help create new LNG demand around the world, it will be China’s liberalised market conditions that will absorb the coming glut and help prices eventually recover.
Mr Tomnay said Chinese demand will contribute to improved regasification infrastructure access, reductions in regulated gas prices and the curtailment of high cost indigenous gas.
“It is likely that output from some high cost gas will be curtailed but protectionist measures will restrict China’s willingness to fully replace indigenous gas with lower priced LNG, dampening the potential supply response,” he said.
The LNG demand outlook will also be influenced by the use of coal for power generation, which Mr Tomnay will speak at length at the Gastech 2015 Market Outlook session on Wednesday.
“Assuming higher Amsterdam-Rotterdam-Antwerp (ARA) coal prices in Europe of US$70/tonne and Japanese coal prices of US$80/tonne (CFR), a floor price for gas in Europe and Asia should be maintained at prices above US$5.00/mmbtu,” he said. This should be sufficiently high to keep the US from shutting down LNG production.
Still, Mr Tomnay cautioned: “At prevailing ARA coal prices of US$50/t and Japanese coal prices of US$60/t CFR, a floor price for gas in Europe and Asia could go down to prices at which many US LNG exports fail to cover cash costs, around US$4/mmbtu. This would force US LNG exporters to consider shutting-in for periods, a move which would depress US gas prices.”
He is also watching the behaviour of major suppliers, most notably Russia, as their withdrawal from the market could support LNG spot prices.
“It was Gazprom’s withdrawal of 20 billion cubic metres/year (bcm/year) of pipe gas from Europe between 2008-10, equivalent to 15 mmtpa of LNG, that prevented spot prices from remaining low,” he said. Amid the current severe glut, Russia’s supply behaviour will influence not just gas prices in Europe, but Asia and the US too.