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LNG markets in transition

LNG Industry,

Dramatic changes are currently taking place in global LNG markets. A substantial increase in LNG export capacity is underway while LNG demand appears weaker than expected, notably in the ‘premium’ Asian market. The industry is no longer an exclusive club, with new companies entering throughout the value chain; challenging the existing structure of the business, in terms of contracts and price mechanisms. This has put pressure on the traditional structure of oil-linked long-term contracts and buyers are no longer ready to accept these traditional contractual terms. They are looking for more flexibility and alternative price indexation terms. The trickle of flexible, non-destination bound and spot indexed US LNG will turn into a flood, reinforcing such changes and putting pressure on other suppliers.

The unprecedented rise in LNG export capacity was underpinned by bullish views that natural gas - the ‘low-carbon hydrocarbon’ - would be the fuel of choice for power generation, displace both coal and high-priced liquid fuels and complement renewable generation. But this story needs revisiting as gas has struggled to be competitive against cheap coal, incentivised renewables and, more recently, cheap oil.

The King Abdullah Petroleum Studies and Research Center (KAPSARC) and the Oxford Institute for Energy Studies (OIES) have assembled a group of leading experts to address the current changes faced by the LNG industry in a book titled: ‘LNG markets in transition: the great reconfiguration.’ The book challenges the inevitability of robust LNG demand and whether supply investments will be made in the face of such uncertainty.

Asia will remain the largest LNG importer for decades to come, but small importing regions could evolve beyond the status of niche markets. Europe will likely act as the LNG demand shock absorber, although limits of this flexibility may be tested by Russia’s appetite to defend its market share. A pause in new final investment decisions over the coming years, exacerbated by low oil prices, may extend the upcoming boom and bust cycle for more than a decade and undermine hopes of a bright future of LNG. But the pessimism may be overdone. New technologies, including floating liquefaction, standardised small scale liquefaction units, and the expansion of niche markets could all change this future. The key to success for the new generation of LNG supply is keeping costs under control while delivering projects on time. Brownfield expansions in politically stable countries are therefore likely to be the winners.

It is nevertheless likely that the accumulation of today’s challenges and developments will undermine 50 years of established practice in the LNG business in many respects. The result will be a more flexible LNG business environment than the one existing today. That world is likely to see a substantial rise in spot cargoes and shorter-term LNG contracts, perhaps even a progression toward hub-based spot prices. Will developers be able to fund and execute their projects without the traditional support of long-term contracts?

‘LNG markets in transition: the great reconfiguration’ is edited by Anne-Sophie Corbeau and David Ledesma.

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