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The glut continues, making it a buyers’ market with a decided shift towards short-term contracts. In China, the move is particularly pronounced. Smaller, independent energy companies are rushing to build LNG terminals along the coast to take full advantage of the growing domestic demand for the fuel. Low prices don’t bother them—they are happy to tap the spot market while the getting is good. However, according to at least one industry insider, this may soon change.
When Petronas announced the cancellation of its biggest investment abroad, its US$28-billionPacific NorthWest LNG project, the news sounded an alarm for the LNG industry, which is already plagued by a glut that has been dragging down prices and eating into producers’ margins.
The chief executive of LNG terminal maker Liquefied Natural Gas Ltd. told Bloomberg in an interview that the shift towards short-term contracts may come back to bite LNG traders. Greg Vesey said that the only way to secure funding for new export/import capacity is through long-term contracts, and failure to ink some may tip the scales towards a shortage as soon as 2021.
The Pacific NorthWest LNG is a case in point. The Malaysian state oil and gas company terminated the project because of low gas prices. In this price environment, the company simply could not afford the investment.
Another terminal builder is backing Vesey’s warning. Kathleen Eisbrenner from NextDecade Corp. told Bloomberg the investment needed for the construction of an LNG export terminal requires a 20-year supply contract. Some—notably large—Asian utilities, are aware of this and are committing to 20-year contracts, but many still insist on riding the spot market wave.
Even so, long-term contracts are still considered the norm, which means that the concern expressed by terminal builders may be a bit premature. Last year, according to the International Gas Union’s 2017 World LNG Report, short and medium-term LNG contracts accounted for just 28 percent of total trade, or 72.3 million tons. This was an increase of 400,000 tons from the previous year. Yet, the IGU noted that the share of short-term contracts has been declining since 2013.
Total LNG trade reached a record-high of 258 million tons last year, up 5 percent or 13.1 million tons from 2015. A 5-percent growth rate may not seem like a big deal, but in the context of the four-year average rate up to that year, which stood at just 0.5 percent, that rate increase is huge. Demand for LNG is undoubtedly rising, and so is production and export capacity. For now, production is still above demand but most of the new capacity seems to be backed by long-term contracts. In the Asia-Pacific, the IGU pointed out, most of the LNG terminals that came on stream in the last two years were supported by long-term contracts, in line with Vesey’s and Eisbrenner’s stance.
Even with a direct link between long-term contracts and LNG capacity, more such projects may be canceled in the coming months. Prices are low, supply is more than demand, and sellers are scrambling to secure contracts by offering even lower than market prices. There is a distinct possibility that the unbalance in the LNG fundamentals will persist into the next decade, some analysts warn, which should quench concern about a potential shortage in a few years because of lack of export/import capacity.
By Irina Slav for Oillprice.com