Rystad Energy: could US LNG pose short-term challenge to Russian gas in Europe?
Published by David Rowlands,
According to the report, significant LNG production growth, the rise of US gas to challenge Russian dominance in Europe, insatiable demand in Asia, price pressure in selected regions, and a need for final investment decisions (FIDs) on planned liquefaction plants are the key market-movers identified in the report.
Rystad Energy’s head of gas market research, Carlos Torres Diaz, said: “The global market for LNG is geared for substantial supply growth this year, mirroring a major increase in US liquefaction capacity. Asia’s appetite for LNG – while vast – is not likely to consume all of the additional volumes.
“With increasing export capacity, US LNG might be in a position to pose a serious challenge to Russian gas on the European market this year. Prices will come under pressure due to the healthy supply situation but the market is expected to tighten again after 2022, meaning that investment decisions for new liquefaction projects are needed this year in order to satiate future demand.”
Theme 1: ramp up in US and Australian LNG production
Rystad claims that global LNG production is expected to increase by 11% and reach 350 million tpy this year, as new liquefaction capacity is added, leading to a looser market. Total liquefaction capacity is set to increase to 434 million tpy this year, up almost 10% from last year.
Torres-Diaz said: “This is mostly driven by the commissioning of US projects. The US is expected to see capacity more than double in 2019, thereby making it the country with the third largest exporting capacity and pushing Malaysia into fourth place. Australia could also overtake Qatar as the world’s largest LNG exporter this year.”
Theme 2: Russia versus US in Europe
According to the report, one of the crucial outstanding questions for 2019 is how much LNG Europe will import, and whether Russia will reduce its gas exports in response or rather try to maintain its market share despite the risk of undercutting prices.
Rystad claims that Russian gas delivered to Europe has a low breakeven price of approximately US$5/million Btu. This compares to a long run marginal cost of between US$6 and US$7.70/million Btu for US LNG.
Torres-Diaz said: “Given the fast increase in supply, US sellers might be willing to sell spot volumes at a short run marginal cost level, which is closer to US$5/million Btu, if they are unable to find enough demand in Asia. Such a scenario could see US volumes compete quite closely with piped imports this year.”
Theme 3: continued surge in demand in China and rest of Asia
According to the report, total Asian natural gas demand is forecasted to increase to 884 billion m3 by 2019, caused by higher consumption in China and selected other countries. China is already the world’s largest gas importer, and is expected to import approximately 87 billion m3 of LNG this year, an increase of 21% from last year.
Torres-Diaz said: “Southeast Asian demand tends to be more sensitive to prices, but could be supported by a low-price environment helping absorb some of the new supply. As for Japan and South Korea, declining demand due to some nuclear restarts and milder weather may lead to lower LNG imports this year, which would compensate for the overall Asian increase.”
Theme 4: will prices in Asia and Europe drop?
Rystad claims that, over the course of the last couple of years, market players have been expecting an oversupply of LNG, but firming Asian demand has helped to balance the market.
Torres-Diaz said: “With the surge in US supply in 2019, LNG prices should come down compared to the levels seen over the past two years, especially since this has been a relatively mild winter and prices are already experiencing a counter-seasonal drop.”
Theme 5: need for new LNG plants
According to the report, the LNG market is looking set to tighten again after 2022, and new liquefaction capacity is therefore needed to keep the market balanced. Projects that reach FID this year can expect to be operational in 2024 at the earliest, emphasising the importance of investment decisions made this year. The market could tighten substantially in 2023 as rising Asian demand catches up with supplies, posing an upside risk for prices in this period.
Torres-Diaz concluded: “Projects developed by large E&P companies will have an advantage since they are not overly dependent on financing and long term agreements. Therefore, we see potential for Qatargas’ huge North Field Expansion project to be one of the first LNG developments to reach FID this year. Other projects closer to the Asian market, like Mozambique LNG, also have a competitive advantage that could help them reach FID earlier than some of the projects on the US Gulf Coast.”
Read the article online at: https://www.lngindustry.com/liquid-natural-gas/08022019/rystad-energy-could-us-lng-pose-short-term-challenge-to-russian-gas-in-europe/
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