Carving out innovative roadmaps to navigate intensifying global competition has climbed to the top of liquefied natural gas (LNG) producers’ playbooks. Stakeholders are jostling to thrive and not just survive for three primary reasons – oil-indexed LNG prices have shadowed plummeting oil prices since mid-2014, the current glut of supply calls for increasingly competitive strategies and there is an ever-growing environmental checklist.
Global LNG demand is weakening; the International Energy Agency (IEA) expects natural gas demand to grow at 1.5% annually through to 2021 compared to the robust 2.2% annual growth seen over the last five years. Yet, global LNG production volumes climbed by 2% on 2014 to 250mn tonnes in 2015, with an additional 125mn tonnes of LNG under development likely to come to market next year, according to consultants Wood Mackenzie.
The disparity between supply and demand makes for dynamic market conditions and innovation is the ultimate tool to safeguard stakeholders’ profit margins until the outlook stabilises, which may not start till at least 2020.
Innovative strategies include ships being turned into floating storage regasification units (FSRU), which has piqued the intrigue of investors seeking business opportunities. The capital expenditure for FSRUs, floating LNG (FLNG) production units and floating import units (FSUs) is expected to reach $41.6bn between 2016 and 2022, compared to $11.4bn during 2011-2015, according to Douglas Westwood’s World FLNG Market Forecast. FSRUs, for example, significantly reduce associated risk for cross-border transactions as they can circumnavigate political unrest — an offering unmatched by onshore pipelines.
The players in the LNG market are also evolving as Shell’s $54bn acquisition of BG Group in February this year — the deal includes some of Australia’s major LNG projects – illustrates major energy companies’ appetite for widening their LNG portfolios.
At the other end of the scale, the world’s small scale LNG terminals market is expected to more than double from the 50.47mn tonnes per year in 2015 to 102.44mn tonnes per a year by 2022, according to Transparency Market Research (TMR).
The growth forecast largely relates to onshore developments, though the offshore profile will gain traction as energy companies explore more small fields. Investors and speculators’ confidence to support such projects will correlate to the growth of liquidity in the market, though financial support is required more immediately for small and medium sized enterprises (SMEs), whose bank balances are creaking amid low prices.
Thinking outside the box must become a long-term strategy as competition in the LNG market intensifies. The US’ first LNG export from the country’s Sabine Pass on the Gulf of Mexico in February this year through the newly-widened Panama Canal signalled a seismic shift in the competitive nature of global LNG markets. Plus, despite a wave of delays, Australia is still likely to become one of the world’s biggest LNG exporters in the 2020s, following the country’s $200bn investment into that industry over the last decade. The combined volume from the US and Australia could account for more than 90% of new LNG exports by 2020, which could challenge Qatar’s position as the world’s largest LNG exporter.
Iran, home to the world’s second largest natural gas reserves, is poised to become an LNG supplier during the next decade following the lifting of the majority of Western-imposed sanctions in January of this year. It is still not clear how Iran will prioritise its pipeline export ambitions over developing an international LNG export business.
The glut of supply means up to 50mn tonnes of ‘un-contracted LNG’ — product without a pre-determined home – is anticipated by 2020 and buyers’ preference for shorter-term contracts is gaining traction at the negotiating table. This signifies a fundamental shift for a market historically characterised by agreements that stretch into decades in order to justify LNG producers’ high infrastructure capital costs.
Political appetite for LNG, which is considered a stepping stone from a hydrocarbon to low-carbon world, will help soak up some of the oversupply over the next decade. Ports in northern Europe, Asia and the US agreed in October this year to collectively work on a standardised framework for LNG bunkering. Antwerp, Rotterdam, Zeebrugge, Singapore and the Port of Jacksonville are among those involved in a historical shift from using fuel oil to LNG as a marine fuel. In addition, the new Emission Control Areas around port zones will propagate the use of cleaner fuels, of which LNG is one.
In the midst of such uncertainty, LNG stakeholders have little choice but to embrace change and use innovation and entrepreneurship as their allies in the battle for stability. But, a balance must be struck so that new roadmaps are not characterised by expensive and risky lone-wolf ventures. Knowledge sharing and collaborations by the greater industry are integral to reducing risks and bills for governments, companies and investors.
John Roper is managing director, head of Middle East, Uniper Global Commodities SE.
