Softening LNG Price Jeopardises New Projects

BMI View: Tumbling LNG prices in the Asian market will put pressure on new and pre-FID LNG projects around the world. The mediocre LNG demand outlook is being met by strong supply from new projects, bringing down the high LNG price dynamics of the previous three years.

Asian liquefied natural gas (LNG) prices have reached their lowest level in over three years as Japanese and Korean demand wanes and new LNG supplies come online. Platts JKM LNG price benchmark moved under the USD11 per million British thermal units (mnBTU) in July 2014 for the first time since spring 2011.

Weak Demand From Key Customers

Narrowing Spread
Henry Hub, NBP And JKM LNG Price (USD/mnBTU)

BMI View: Tumbling LNG prices in the Asian market will put pressure on new and pre-FID LNG projects around the world. The mediocre LNG demand outlook is being met by strong supply from new projects, bringing down the high LNG price dynamics of the previous three years.

Asian liquefied natural gas (LNG) prices have reached their lowest level in over three years as Japanese and Korean demand wanes and new LNG supplies come online. Platts JKM LNG price benchmark moved under the USD11 per million British thermal units (mnBTU) in July 2014 for the first time since spring 2011.

Weak Demand From Key Customers

The slowdown in demand from the two largest LNG importers in the world has seen them scale back purchases from their long-term contracts due to sufficient storage levels. This has driven major global producers to have surplus volumes available for sale on the spot market, depressing prices.

Korea imported large volumes of LNG over the winter period (2013/14) in order to stockpile gas while much of its nuclear sector remained offline. This played a part in pushing up spot prices to near USD20/mnBTU in March 2014. However, a restart of the Hanul No.1 reactor on July 10, will see demand for gas in Korea reduced.

Similarly in Japan, the summer season, which usually sees increased energy demand from air-conditioning, has been milder than usual. This has led to lower-than-expected energy demand and far less need for LNG spot purchases, helping to soften prices. Japan could also see restarts of some of its nuclear facilities before the end of the year, which will enable the country to reduce its reliance on the LNG spot market.

Supply Remains Strong

At the same time as demand wanes, we have seen highly stable production from the largest global LNG producers: Qatar, Australia, Indonesia and Malaysia. Production outages have been far fewer than over the same period in previous years. Further adding to supply, ExxonMobil's PNG LNG facility began exporting cargoes to Japan in late May and is ramping up production.

These supply and demand factors have pushed Asian LNG prices down, halving the spread between Henry Hub prices in the US to around USD7.6/mnBTU from around USD15/mnBTU in November 2013. The current price dynamic is favourable for large LNG buyers, which have suffered considerably over the past few years with LNG spot prices consistently over USD15/mnBTU.

Narrowing Spread
Henry Hub, NBP And JKM LNG Price (USD/mnBTU)

We expect Japanese and South Korean LNG demand to largely stagnate, especially with the returning presence of nuclear power to the energy mix. China, India and Taiwan are the next three largest importers of LNG, and we also see limited demand growth from these markets.

Minimal LNG Demand Growth
Net LNG Imports (bcm)

Domestic gas production increases as well as a struggle to connect LNG terminals to end-user markets will see Indian demand remain limited. The country imported less LNG in 2013 than it did in 2012. China will see the largest growth in LNG demand, however increasing gas pipeline connections with central Asia and Russia are expected to see demand reduce post 2018 ( see 'Geopolitics Take Centre-Stage In Sino-Russian Gas Deal' May 22).

LNG prices will regain strength towards the end of the year as seasonal demand returns. However we do not expect the high price environment of the previous three years to be sustained, considering the dynamic of sufficient supply and tepid demand expected over the next two to three years.

New LNG Project Risk

Major new LNG projects are therefore coming under greater threat. Those already under construction may find difficulties in selling in the spot market, while projects awaiting final investment decisions (FID) could be postponed if the current gas pricing dynamic continues.

Australia has around 85bcm of LNG projects due to enter operation over 2015-2017. While much of this capacity has already been contracted, around 20% will be available on the spot market, further improving the supply picture. Weak spot prices could put considerable pressure on the economics of Australian projects, many of which have run billions of dollars over budget ( see 'Costs Explode With Alternative Suppliers Poised To Enter Market', April 2013). New supply from Indonesia, Malaysia, Russia and the US will also help keep the supply picture buoyant over the coming five years.

Major LNG Projects Under Construction
Country Project Capacity (bcm) Planned Start-Up
Australia Queensland Curtis 11.73 2015
Australia Gladstone 10.76 2015
Australia Australia Pacific (APLNG) 12.42 2015
Australia Gorgon 21.53 2015
Australia Wheatstone 12.28 2016
Australia Prelude 4.97 2017
Australia Ichthys 11.59 2017
Indonesia Donggi Senoro 2.76 2015
Malaysia Petronas FLNG 1.66 2015
Malaysia Rotan 2.07 2016
Malaysia MLNG Train 9 4.97 2016
Russia Vladivostok Phase I 6.90 2018
US Sabine Pass Trains 1, 2 12.42 2015
US Sabine Pass Trains 3, 4 12.42 2017
Source: BMI Research

Projects that have not yet reached FID could be delayed or cancelled altogether. We have already seen a number of Australian LNG plans scrapped and interest in the market fall due to increasingly unfavourable economics ( see 'Woodside Sell Reiterates Weak LNG Sentiment', June 17).

A long awaited FID on Mozambique LNG, expected before the end of 2014, could also be delayed if the consortium chooses to search for new purchasers. Currently only around 65% of capacity has been provisionally contracted.

If the current gas price dynamic is sustained, it will also drive a rethink in a number of US and Canadian LNG projects. With the US-Asia gas arbitrage opportunity considerably narrowed, we expect only the highest margin projects to proceed. Similarly, challenges with permitting for Canadian projects, and with keeping costs down, will also strain the speed at which projects will materialise ( see 'LNG Project Economics Could Shake Asian Interest', November 13 2013).

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This article is tagged to:
Related sectors of this article: Oil & Gas, Projects, LNG
Geography: Asia, Australia, China, Indonesia, Japan, South Korea, Malaysia, Taiwan, United States
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