Outlook shows new supply bringing LNG market back into balance by 2025
New production capacity will bring global liquefied natural gas supplies back into balance with demand by 2025 and stay that way for at least a few years under the most recent long-term outlook from Poten & Partners, an international advisory firm on oil, gas and shipping markets.
Most of the additional supply scheduled to come online this decade already is under construction or has reached a final investment decision to start work, Kristen Holmquist, Poten’s head of data analytics, said in a webinar on July 27.
The global market is expected to reach about 400 million metric tons this year, with the company’s outlook showing the number climbing to about 550 million by 2032, though that depends in part on price and the global economy.
At 550 million tons, about half the total market demand would be covered by currently existing or under-development projects in the United States and Qatar, the two largest producers in the world.
In addition to projects under construction or with a positive final investment decision, Poten lists 11 more ventures on the U.S. Gulf Coast and Mexico’s West Coast working toward final investment decisions by the end of 2023, adding to North America’s role as a supply powerhouse.
Most already have sold at least a third of their production capacity, as developers need to have most of their output locked down under contract to obtain construction financing.
“We’ve really seen a large amount of progress … a flurry of activity with U.S. LNG projects” signing up customers, particularly long-term contracts, Holmquist said, though she acknowledged “there’s still some work that needs to be done” for any of the 11 projects to reach an investment decision.
The proposed Alaska LNG project is not on Poten’s list of potential final investment decisions by the end of 2023.
In addition to the U.S. and Qatar, new export operations are under construction or forecast to come online over the next several years in Canada, Mozambique and even Russia.
However, Western sanctions on technology, equipment and financing will delay Russia’s LNG ambitions, Holmquist said. “We do expect most of the (Russian) projects proposed eventually to start up,” though that will depend on what happens with the war in Ukraine.
Russia’s Arctic LNG-2 project, across the bay from its Yamal LNG terminal, the country’s first on the Arctic coast, had been expected to start operations in 2023, ramping up to full production of almost 20 million tonnes by 2025. However, Western sanctions have denied the venture the technology and equipment needed to stay on schedule.
Poten’s analysts expect “prices will come down sharply over the next couple of years” as new supply comes online from the U.S., Qatar and elsewhere, Holmquist said. LNG prices have spiked to record highs this year as Europe pays to replace Russian gas, forcing Asian buyers to match the price or lose the cargoes.
Those high spot-market prices — generally ranging between the high $20s per million Btu and a record $59 in Asia in March, just two weeks after Russia invaded Ukraine — have a downside, Holmquist said. Gas could become unaffordable, particularly in developing and emerging nations that cannot pay the bills. She said the possibility of permanent demand destruction “is a risk to the forecast.”
Another downside risk to the demand forecast is China: The more it boosts domestic gas production and the more it takes gas by pipeline from Russia, the less imported LNG it needs to buy, Holmquist said. “Domestic production in China is growing more rapidly than we had expected.”
China also is spending more money to boost domestic coal production. The government has announced plans to spend $15 billion to increase coal output, Poten said in a recent LNG market outlook report. China sees coal as an affordable backup to avoid power shortages, particularly if LNG supplies are tight or too expensive.
Pipeline gas from Russia also costs less than LNG, and volumes to China through the Power of Siberia line are up 60% this year, Poten said.
The line, which started service in late 2019, is slowly ramping up toward full capacity at more than 3.6 billion cubic feet per day. Poten expects the volume this year will be about 40% of capacity. Full capacity would equal about 10% of China’s overall gas consumption last year.
And while Poten forecasts LNG demand to resume growing in China next year — this has been a down year due to high prices and China’s economic contraction as it shuts down cities to block COVID-19 infections — it expects stronger growth numbers in other Asian nations.
“The market is shifting away from Northeast Asia,” Holmquist said.
Forecast demand growth from India and Germany alone by 2032 will outpace China, she said. Germany is expected to take its first LNG import cargo ever next year.
Japan’s LNG needs are in permanent decline, due to falling population and a strong push to decarbonize its power generation, the analyst said.
Still, China will be a major buyer in the years ahead. The country has almost two dozen regasification terminals in operation, 22 under construction, and more possible, Holmquist said.
Other countries in Asia, seen as potential growth markets for LNG, face economic struggles. Future gas sales will depend a lot on price, she said, listing India, Pakistan, Bangladesh, Vietnam, Thailand and the Philippines as price-sensitive buyers.
If prices come down and those countries can strike supply deals, their combined demand growth for LNG imports could total half again as much as China by 2032, Holmquist said.
Traditional long-term LNG supply contracts were linked to the price of a barrel of crude oil, pegging gas at a rough energy equivalent to burning oil. U.S. developers are pricing their cargoes at the market cost of the gas that comes into the LNG plant plus a fixed liquefaction fee.
That pricing structure is an attractive option for buyers looking to diversify their supply portfolio and price risks, and the liquefaction fee has come down substantially since the first contracts were signed in 2014 with Cheniere Energy, the first and largest U.S. LNG producer.
Initial contracts set the fee at $3.50 per million Btu for liquefaction services, but cost efficiencies and competition have dropped the contract rate under $2.50, and even less than $2 in some contracts, Poten reported.
Long-term commitments are another concern for demand growth. Some European buyers remain reluctant to sign long-term contracts, concerned about locking in 10 or 20 years of fossil fuel supply as countries are accelerating their turn to renewable energies, Holmquist said.