​New global LNG projects under pressure as supply overshoots demand, costs too high

Inside the Petronas floating liquefied natural gas (FLNG) vessel Satu. Image: Petronas

The future of new LNG projects is under considerable uncertainty on the back of a recent wave of new projects coming to market and low prices triggered by the fall in benchmark oil pricing.

Supply is significantly overshooting demand.

The dramatic spreads between gas markets in Asia and North America that began in 2011 unlocked 160 million tonnes of new LNG projects into a market of only 325 million tonnes, says Geoffrey Cann, partner with Deloitte Canada.

Cann is speaking about natural gas and LNG developments at the upcoming Canadian Energy Research Institute (CERI) Oil & Gas Symposium.

Since 2015 and continuing through 2017, he says that one new four million-tonne LNG train comes online every 40 business days. This equates to an incremental 1,200 cargoes looking for a market within the same timeline. Much is on contract, but many cargoes are heading into portfolios without clear destination.

More supply will follow

More supply will follow as five U.S. projects under development proceed through commissioning, and the remaining Australian projects (Inpex, Prelude, Wheatstone and Gorgon) finish in 2017 and 2018, Cann says. Dozens of projects are slowly progressing through approvals, awaiting a market signal to proceed.

Meanwhile, the demand outlook is slowly shifting. Deloitte estimates LNG demand will grow 4.5 per cent per year between 2015-2035. The number of LNG buyers is growing. Countries with import facilities have doubled in the past 10 years, and will likely double again, helped along by new low-cost, small-scale floating storage and regasification units.

The new buyers will be different from the buyers of the past, Cann adds. The next group is likely to be smaller, second-tier cities in China and India, more island economies and ports. There will be many more individual buyers who may purchase more frequently and in smaller volumes.

Buyers will naturally want to diversify their supply and are expected to source from multiple producer countries to minimize risk while creating options for supply management and optimization. Buyers will also have the ability to take in cargos and reload them back into the market as conditions warrant.

Gas usage

Demand for natural gas is expected to increase as end-uses change. More gas will feature in transportation applications to displace diesel in rail and trucking, and bunker fuel for ocean shipping, Cann said.

In many cases, gas buyers will have options on what fuel to use in which application, which will be based on the cost of fuel alternatives.

As with most energy shifts, it will take a long time for this demand to unfold, he noted.

Meanwhile, commodity pricing weighs heavily in the decision to sanction new projects, and the gap between breakeven pricing and current market pricing is too vast for most projects to achieve sanction.

Deloitte recently completed a detailed benchmarking exercise of 45 global LNG projects.

“Our analysis shows that 23 of these projects require a lifetime break-even price of $9/mmBtu DES Tokyo. The nine most recently completed LNG projects in Australia require a break-even price of at least $12 and as high as $16 over a sustained 20 year period.”

Contract pricing for LNG in Tokyo in December averaged about $7.50/mmBtu, and spot prices were somewhat higher because of improved demand in the winter heating months, at $8/mmBtu.

With today’s low commodity prices, it is difficult to envisage a scenario where LNG prices will double to the required break-even price, which would require benchmark oil prices to rise to $100/bbl, Cann said.

“Our analysis also shows that in order to be approved, Australia’s next generation LNG projects must improve on the existing Australian project economics by accelerating project delivery by 30 per cent, reducing ongoing capital cost by 47 per cent, and ongoing operating expense by 75 per cent.”

It’s a similar situation being faced in Canada, where greenfield LNG projects are similar in design and scope with high quality gas reserves, long pipelines, large tidal greenfield plants, remote and costly construction sites.

Similar cost targets therefore apply, which helps explain the slow and cautious pace of LNG approvals in Canada.

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