LNG outlook: what price will gas pay for the low cost of oil?

October 2015 | Rembrandt Sutorius

The outlook for the LNG market over the next 15 years looks set to be a game of two very different halves. In the short term, the realization of a number of new infrastructure projects and the opening of new export routes will satisfy even the most demanding marketplaces and see a move towards price convergence. Longer term, there’s a very real danger of under-supply and a return to divergence.

And the catalyst for this change of fortunes? Oil. Or rather, the downward trend in oil prices, which shows no sign of reversing any time soon.

Much of the global gas economy is still intrinsically linked to oil – Asia and Europe still use oil-linked price indexing, and while prices are low, gas follows suit.

Right now, while the downward pressure on prices remains, we’re seeing a move towards global gas price convergence.

Will LNG price convergence remain?

North America has enjoyed low gas prices for some time, as a result of over-supply. Reaching a low of less than $3 mmbtu this summer, the US industrial sector in particular has taken advantage of cheaper supplies and stepped up its operations in response.

Prices in Europe and Asia meanwhile topped out at around $10-12 mmbtu and $13-16 mmbtu respectively between 2012 and 2014, but these have dropped and continue to fall, settling between $6-$8 mmbtu in 2015 – much closer to their North American counterparts.

Such low prices however, will be unsustainable longer-term without major cost deflation in the industry. If oil prices keep gas prices down, and as a consequence, any potential profit margin for new gas supplies is wiped out, almost all proposed LNG projects will struggle to take FID. Meanwhile oil and gas companies, who have already seen their income tumble over the past 12 months, will be limited in their ability to reinvest.

Of the new capacity that will need to be contracted by 2030, prices of $9-10/ mmbtu or more will be required to cover project costs. At current cost and market prices, the construction of new liquefaction facilities simply won’t be an option.

Who will satisfy global LNG demand longer term?

Between now and 2022, FIDs which are coming online, primarily in the US and Australia, will more than fulfil global demand levels, which look to be around 431 bcm by 2020.

After 2022, and as demand continues to grow by around 4.5% p.a. to a peak of 664 bcm in 2030, the market will contract and we’ll see a return to price divergence.

The most demanding countries, whose growing economies and populations will place even greater pressure on resources, will need to secure imports to mitigate the challenge of a less fluid domestic market.

Whether these will be provided by new market entrants from the Middle East, including Iran, which is rich in resources but has previously been prevented from exporting globally due to trade restrictions, remains to be seen.

What is clear is that any short-term gain as a result of oil-linked pricing will be a distant memory by the middle of the 2020s if the oil market doesn’t turn soon and capital costs stay at their current high levels.


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About the authors

Rembrandt Sutorius is a General Manager in Energy Insights' Amsterdam office.