• Thursday, July 25, 2024
businessday logo

BusinessDay

As Asia LNG boom fades, new frontiers emerge

businessday-icon

Asian LNG demand is expected to rise by 7 percent to 187 million tonnes this year before falling 2 percent, about 4 million tonnes, in 2016 as Japan and South Korea turn to other fuels.

Asia has traditionally taken more than 70 percent of annual global liquefied natural gas (LNG) demand, and exporters developing new projects look to China, Japan and South Korea, the world’s top three buyers, as the most reliable outlets. However, Asia’s spot LNG prices have fallen two-thirds since February 2014 as a 60 percent fall in oil prices undercut energy values worldwide. Analysts forecast that benchmark oil-indexed LNG contract prices into Japan will not start to recover until at least 2018.

Spot LNG prices in East Asia for March slumped below hub price levels in northwest Europe in the second week of February as the region’s utility buyers threatened to switch to cheaper crude and fuel oil imports.

The February East Asia Index shed $2.510/MMBtu to $6.771/MMBtu during its time as front-month contract from 16 January to 13 February. The March contract fell by $2.475/MMBtu over the same period to $2.475/MMBtu.

The March EAX started the period at a $2.503/MMBtu premium to the Northwest European Index (NEX), but fell to a $1.352/MMBtu discount on 13 February, as European gas hub prices climbed in response to field outages in the first half of January.

As the period opened on 16 January, sellers’ hopes of keeping prices above $9.00/MMBtu quickly receded in the face of weak regional demand, as demonstrated by the failure of end buyers to participate in Australia’s Northwest Shelf tender for Q1 and Q2 deliveries. Explosive Asian growth in LNG consumption has also stalled as the region’s economic growth cools, in China in particular. Nuclear energy, coal and fuel oil use are expected to pick up in Japan and South Korea.

ANZ bank said a stabilisation in crude prices would mean benchmark Japan contract LNG prices settle around $10/mmBtu in 2016, a level that would still be too high for US exporters to sell into Asia profitably.

Europe as the new frontier

Forecasts show European demand jumping by two-thirds next year to 61 million tonnes. And while the continent’s demand is expected to be flat this year, it has attracted twice as many LNG tankers in January and February as in the same two months last year suggesting imports may rise as soon as this year.

Market dynamics have changed in a dramatic fashion since June 2014 with the rapid decline in Asian spot free-on-board LNG prices putting them at about a $1 discount to European hub delivery prices of around $8 per million British thermal units (mmBtu).

As the global LNG market tips into a state of oversupply, surplus LNG cargoes are flowing back into Europe and European hub prices are acting as a key global price support.

Demand for LNG from the small Baltic states of Lithuania, Latvia and Estonia, along with Poland, is small compared to the huge volumes going into Asia. Together, demand from the Baltics and Poland would be about 6 million to 7 million tonnes a year, judging from the size of import terminals due on line this year in Lithuania and Poland.

However, since Europe may reduce annual piped gas imports from Russia by a quarter, about 45 billion cubic metres (bcm) a year, equivalent to more than 30 million tonnes of LNG, over the next five years, that may open up more markets for LNG.

This year in Europe, imports climbed substantially above their levels in 2014 as sellers with long-term contractual positions delivered flexible volumes at the relatively robust hub prices. UK and Belgian terminals received 12 Qatari vessels from 16 January to 13 February, up from four in the same period of 2014.

FRANK UZUEGBUNAM