• Thursday, May 30, 2024
businessday logo


The changing landscape of global LNG market

The changing landscape of global LNG market

After four years of global stagnant liquefied natural gas (LNG) consumption stemming from high market prices (from 2011 to the end of 2013) and a challenging supply environment, LNG demand finally began growing again in 2016, according to a report by BCG.

More than 50 billion cubic meters per annum (bcma) came online during 2016. This supply growth is outstripping demand requirements, preventing a rebound in LNG prices which began to decline in 2014 and squeezing industry margins.  While LNG suppliers may be locked into long-term shipping contracts, LNG buyers are asking for contracts that reflect the lower spot charter rates.

READ ALSO: NLNG paid FG $18.3bn as dividends in 20 years

Meanwhile, new sources of demand growth are creating additional challenges. Beyond China and India, where consumption increased by roughly 20 per cent in 2016, significant demand growth is coming from niche markets, such as Egypt and Pakistan. Contracts in these markets are typically higher risk and for lower volumes and shorter periods than contracts in more established markets. As a result, it is difficult to leverage the demand from niche markets to finance new liquefaction projects.

The LNG market, which now stands at about 350 bcma, or roughly 10 per cent of the total natural gas market, will face significant challenges owing to oversupply for the next three to five years. Until recently, historically large and developed markets, including Europe, Japan, and South Korea, accounted for the bulk of LNG demand and growth. These markets have low credit risk and typically can be served through traditional long-term contracts involving volumes of more than 1 bcma.

However, new markets have become a major driver of demand. The number of countries importing LNG grew from 9 in 1990 to 31 in 2015. In particular, five nascent markets; Egypt, Pakistan, Jordan, Lithuania, and Poland, grew substantially from 2014 through 2016. New demand from these countries reached nearly 19 bcma in 2016, equivalent to the total combined demand of Spain and Italy.

READ ALSO: Higher Asian LNG prices raise the prospect for Nigeria

This trend is expected to continue, with a number of other countries potentially beginning to import LNG by 2025. Among the possible new markets are Bangladesh, the Philippines, Malaysia, Indonesia, Bahrain, Panama, Uruguay, Colombia, the Caribbean region, Morocco, and South Africa.

However, substantial oversupply, driven by the 190 bcma of additional capacity projected to come online in the next three to five years is expected. That oversupply will keep LNG spot prices at low levels and put pressure on industry margins, while increased liquidity in the market will squeeze marketing margins.