Trends in the global Liquefied Natural Gas (LNG) market indicate that the projected 500 million tonnes per year (mpta) demand growth by 2030 will be fuelled by shorter-term contracts as current supply volumes increase but Nigeria LNG (NLNG) is betting on long-term contracts.
According to the Gas market report released by the International Energy Association (IEA) on Tuesday, industry will become the largest contributor to the increase in global gas demand to 2023, taking the lead from power generation, which had historically held this role, thus raising the need for flexible shorter-term contracts.
The IEA says that overall, industry accounts for over 40% of growth in global gas demand to 2023, followed by 26% for power generation. The change is especially marked in Asia and other emerging markets due to higher gas use in industrial processes and as feedstock for chemicals and fertilizers.
Major changes are expected also from the supply side, with the United States leading gas production growth worldwide to 2023, largely due to the on-going US shale revolution.
“Most new US supplies will be geared to export markets as LNG or through pipelines. The development of destination-free and gas-indexed US LNG exports will provide additional flexibility to the expanding global water-borne traded market.
However, NLNG supplies are indexed to oil and contain destination clauses which does not allow for flexibility. It is currently trying to remarket expiring contracts.
The fortunes of the NLNG have grave implications for Nigeria. Through the NLNG Nigeria has received $15billion in dividends. For the past 6 years, NLNG has paid over $5billion in taxes and employed 2,000 Nigerians directly and another 18,000 through vendors and contractors. At 4 percent, the company is a major contributor to Nigeria’s GDP.
Analysts say the company may need a new strategy to engage the market. “The changing LNG market is creating a need for a new strategy,” Olufola Wusu, an energy lawyer and co-founder of Megathos Law Practice told BusinessDay earlier about the matter.
The IEA say LNG is progressively taking a larger share in global gas trade, especially in Asia. LNG trade as a share of total gas trade is forecast to rise from a third in 2017 to almost 40% in 2023.
“Emerging Asian markets will account for about half of global LNG imports by 2023. This continued rise in the LNG market will have significant impacts on trade flows, pricing structures and global gas security,” says the IEA.
The Paris-based think tank further says the current wave of LNG export projects will increase liquefaction capacity by 30% by 2023. Nigeria has not been able to add new capacity since the NLNG Trains 1-6 were completed.
Leading industry players also agree that the market is shifting to shorter-term contracts. Charif Souki, chairman at US LNG developer Tellurian Inc., at the Flame conference in Amsterdam on Tuesday, said long-term contracts in the LNG sector would soon be a thing of the past.
“The market has become sufficiently liquid today that a buyer does not need to enter into a long-term contract,” Souki — who was the founder of US LNG pioneer Cheniere Energy – said according to reports by Platts.
Souki said that in the next two years, some 20 cargoes would be available every day on the spot market, or 5,000 cargoes a year. “You’re never very far from a cargo,” he said.
“There is no incentive, no imperative to have a long-term contract,” Souki said, unless a buyer is a large utility that needs the guarantee of supply.
“You have to prepare yourself for the next generation which is a transition to a true commodity business where you don’t need a long-term contract. With a 50 Bcf/d market, with LNG on the water, I doubt very much the necessity for long-term contracts is going to remain for much longer,” he said.
Mark Gyetvay, CFO of Russia’s Novatek, agreed that the long-term contract was coming under pressure, saying that Novatek was looking at a combination of different contract lengths to offer prospective buyers from its planned Arctic LNG-2 project.
These, he said, could include some spot, short-term and medium-term arrangements.
Total’s head of gas, Laurent Vivier, meanwhile, said the long-term contract could still have a role to play, but said that size was the crucial factor.
“LNG is a commodity ‘in the making’,” he said. “There could still be a need for long-term contracts to help finance new LNG projects.”
But, he said, a company needed to be global and have a big portfolio, and that final investment decisions for new projects depended on that visibility.
