Conventional wisdom in the liquefied natural gas (LNG) sector is that no new projects will be built for several years, given the vast cost can’t be reconciled with the current low prices.
This view has led some in the industry to predict that the market will flip back to a structural shortage sometime in the early to mid-2020s, once again sending prices soaring as new supply takes so long to be built and become operational.
The cancellation or deferment of investment decisions on several projects in Australia, Canada, the US and elsewhere seems to perfectly illustrate the view that no new LNG will be coming to market once the plants currently under construction are completed.
The wave of LNG building in recent years has seen eight projects being built in Australia, with five now operating and the remaining three nearing completion, and five in the US, the first of which has starting shipping cargoes.
This has helped drive LNG from a structural deficit to a surplus, with the attendant decline in Asia spot prices from a high of $20.50 per million British thermal units (mmBtu) to a record low of just $4 in April this year.
Long-term contract prices linked to crude oil have also suffered as Brent has slumped, further undermining the economics of new plants.
Australia’s biggest LNG operator, Woodside Petroleum, shelved plans to build the $30bn Browse LNG project in Western Australia state in March, citing oversupply and low prices.
Royal Dutch Shell and Malaysia’s Petronas have also pushed back final investment decisions on greenfield LNG developments on Canada’s west coast, and progress has slowed on planned US projects and those in frontier countries such as Mozambique and Tanzania.
The era of mega-LNG projects appears to be over, at least for now.
This point was underscored by Saul Kavonic, a senior analyst at consultants Wood Mackenzie, who told the Australian Petroleum Production and Exploration Association conference in Brisbane this week that the country’s wave of recent LNG projects had failed to meet hurdle rates.
The average breakeven cost for the recent projects, which could see Australia overtake Qatar as the world’s biggest supplier of the super-chilled fuel, is $12.60 per mmBtu, a price well above the current spot level and also most long-term oil-linked contracts.
However, while Kavonic said that building new projects is unviable in the current situation, Australian LNG producers can boost volumes if demand warrants increased supply.
The first way to do this is through de-bottlenecking existing plants, a process Kavonic said delivered an average 14% boost in capacity at LNG plants that have implemented the efficiency measures in the past.
An additional 4mn tonnes per annum of LNG is probable and a further 6mn possible from de-bottlenecking, Kavonic told the conference.
These are fairly significant numbers, as 10mn tonnes would represent an 11% increase in Australia’s eventual capacity and is just under half of Chinese annual demand.
The second way to boost capacity is through brownfield expansions, which Kavonic said typically cost about 30% less than building projects from scratch.
This could add more than 10mn tonnes in Australia, but Kavonic estimates that brownfield developments would require a price above $8 per mmBtu to be economically feasible.
A third way to boost capacity is backfill, which involves committing new gas to existing projects to allow them to continue operating beyond their expected and planned life.
While this doesn’t add new capacity, it prevents volumes from leaving the market, and Kavonic estimates that 15mn tonnes of capacity could be maintained by 2030 if companies adopt backfill policies.
What becomes clear is that there are substantial volumes of LNG that can come to the market in the coming years at considerably lower prices when compared to the huge cost of developing new plants and natural gas fields to supply them.
There are of course some fairly significant hurdles, the main one being the need for the various companies in the industry to put aside rivalries and work together to share infrastructure and establish joint ventures to supply natural gas to LNG trains.
“Boys and girls don’t like to share their train sets,” was how Kavonic put it, a jest that rings true when looking at the three adjacent coal-seam gas to LNG plants recently built at Gladstone, on Australia’s east coast.
These plants don’t share infrastructure even though it would have been more cost-effective for all concerned if they had jointly developed facilities such as pipelines, storage, jetties and power supply.
Perhaps the expected period of low prices in the next few years will encourage the sort of innovation and cooperation that would allow LNG producers to increase output at competitive costs should demand grow strongly in the 2020s.
* Clyde Russell is a columnist for Reuters. The opinions expressed are those of the author.
An LNG tanker is moored at ConocoPhillips’ LNG facilities in Darwin, Australia (file). The cancellation or deferment of investment decisions on several projects in Australia, Canada, the US and elsewhere seems to perfectly illustrate the view that no new LNG will be coming to market once the plants currently under construction are completed.
