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Looking for growth

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LNG Industry,

The demand for LNG has historically been higher in Asia than in other parts of the world. The sheer distance and time needed to ship LNG to the region are mainly to blame for higher prices in Asia, while other political factors continue to play a role. As Asian markets account for 75% of all LNG imports, their role in the development of the global LNG market is decisive.

Examining Asian and global markets and the challenges of strategic investment and global volatility, this article takes a critical look at the growth prospects of the LNG industry.

Nuclear demand

In 2011, the Fukushima nuclear incident and resulting stand-down forced Japan to scurry for imported energy sources to replace power that had been generated by its idled nuclear reactors. Turning to much higher imports of oil, coal, and LNG to make up for this shortfall, Japanese imports soon represented almost 50% of Asian LNG imports.

This prompted a spike in LNG prices of almost 200%, reaching close to US$20/million Btu and, in turn, sparked a rush in the West to build LNG facilities and export terminals. Additionally, the immobilisation of some nuclear reactors in South Korea amid a scandal over fraudulent operating certificates contributed to significantly higher prices for LNG in Asia compared to the US and Europe.

Higher prices combined with high demand made Asia a very appealing market, until Japan and South Korea began restarting their nuclear reactors, diminishing the need for high LNG imports. Coal-fired power plants are also running at high capacity due to the lower cost of coal.

Growth in the Chinese market has also not materialised as anticipated, forcing China’s LNG import terminals to operate at only 55% of their design capacities. Consequently, China currently has more LNG import infrastructure than LNG demand, with 13 terminals in operation and more under construction. As a result, the appeal of serving the Asian LNG markets has decreased.

A high price

Most of the Asian market’s pricing is driven by long-term supply contracts indexed to the cost of oil, unlike in Europe, where prices are usually tied to gas hub prices and spot-market trades. As a result, Asian LNG prices have typically been double those of Europe. However, the global decline in oil prices – LNG has also fallen to just over US$7/million Btu – is forcing Asian consumers of LNG (who are tied into long-term contracts with high prices) to attempt to renegotiate their position. Following the safety-in-numbers principle, talk of forming bilateral economic business alliances to renegotiate with LNG suppliers for reduced pricing by purchasing LNG in bulk has been rife. If successful, these actions will also add to LNG’s downward cost trend, or at least keep it from rising to 2013 levels.

If we add to that the cooling of many Asian economies – such as China, which is experiencing its slowest growth in 25 years – rebalancing worldwide LNG prices looks increasingly possible. However, as economic growth slows and demand stagnates, the potential oversupply of LNG will undoubtedly have an impact on prices in the long-term.

Supply volatility

Further influences that may be a factor in future volatility are the numerous new LNG facilities that are being constructed. This proliferation could create a global supply glut, causing prices to become less predictable over the next few years as that supply reaches Asia and the rest of the market. For example, the Queensland Curtis LNG (QCLNG) facility in Australia will likely cause further significant downward pressure, along with the seven other Australian LNG projects currently underway, scheduled to begin production by 2019. Worldwide, there are another nine LNG projects under construction whose full capacity should hit the market by 2020.

Once these new facilities come online, their production output will add to the oversupply of LNG already available. Due to the existing price decrease, other projects that were slated for Final Investment Decisions (FID) have been sidelined and put on hold, awaiting further developments in the volatile environment before determinations are made as to whether or not to move forward with their construction.

Political influences

Geopolitical forces are also involved. While Russia is a major exporter of LNG, economic sanctions against Russian entities, due to its military involvement in the Ukraine conflict, have driven many EU nations to seek other sources of supply. This in turn has made more Russian LNG available to Asian buyers than current demand there can support.

European demand for LNG had been declining since the 2011 recession, and last year LNG consumption in Europe dropped to a 10 year low, accounting for roughly 14% of the global demand. However, starting in 2015, LNG demand in Europe appears to be turning around, with LNG import facilities in the UK, the Netherlands and Belgium currently witnessing twice as much activity as a year ago. These increased imports tie-in with the EU ongoing divestiture of – and efforts to break free from – Russian supplies. Growth will likely be slow and may not supplant the size of the Asian market in the short-term, but it could cause a shift in market focus, in turn having a balancing effect on prices.

As part of that process, Europe has begun to intensify its efforts to diversify its energy supply sources. US and Canadian shale gasification to LNG are among the anticipated sources. The EU’s strategy is to concentrate on natural gas, which will mean the construction of new, or the expansion of existing, import terminals, pipelines, processing and compressor facilities and other distribution infrastructure to replace the facilities currently utilised to bring LNG from Russia into Europe.

These actions will not occur overnight, but the EU appears determined to find other avenues to meet its long-term energy needs, and projects are well underway. The drop in LNG prices may thus help offset the costs of importing LNG from markets other than Russia.

Whether Russian LNG ceases its flow into Europe and at what pace remains to be seen. As the most obvious customer for Russian gas, China agreed to a deal with Gazprom last year for the supply of 38 billion m3 from eastern fields. Gazprom recently indicated that those supplies might begin later than the originally announced 2019, but negotiations between Gazprom and the China National Petroleum Corp. (CNPC) executives on supplying gas to China via the western route have continued. This suggests that Russia’s desire to circumvent European markets is as open as Europe’s antagonism towards its supply. 


While Asia remains, and likely will remain, the largest consumer of LNG for some time, global influences and political uncertainties will continue to impact the industry and potentially spur unpredictability for some time to come. Obstacles such as potential oversupply, consumer bloc price renegotiation via business alliances, political implications driven by economic sanctions, and new or renewed nuclear power generation, will have to be considered to maintain LNG’s profitability, market share and growth.

While it is a market that should be approached with a healthy degree of caution, there is room for profit if producers are willing to ride out current volatility. In the short-term, the labyrinth of uncertainties may seem prohibitive, but as the global energy market slowly finds its feet again, LNG will surely have a significant role to play in its future.

Written by Mike Johnston, T.A. Cook Consultants Inc., UK. Edited by

This article originally appeared in the October 2015 issue of LNG Industry.

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