New LNG markets to carry future growth in demand
February 2016 | James Walker
Much attention has been paid recently to LNG demand and supply dynamics, and the impact of potentially lower demand growth on LNG prices and “Buyers” versus “Sellers” market cycles. While stagnating demand in traditional LNG markets may indeed be today’s reality (e.g. in certain established Asian markets), new and recently opened LNG markets are key to the growth in demand that producers will be hoping to see in the coming years.
The US Energy Information Agency recently announced that Chinese LNG demand fell in 2015 by 1.1% versus 2014, the first fall since that market opened a decade ago. And this week, Japan’s Ministry of Finance announced a 14% fall in LNG imports in January 2016 compared with the same month one year earlier - explaining the decline on reduced power output and a warmer than average winter. These trends will no doubt remain a concern in the near term.
Looking further out, we expect LNG demand to grow by 6% p.a. between 2015 and 2020 (roughly 60mtpa). However, nearly 100mtpa of new LNG production will also be entering the market in the same period, mostly from US and Australian plants that have already taken FID. The LNG market may indeed by oversupplied out to beyond 2020, unless demand picks up significantly or delays or disruptions affect supply.
Future LNG liquefaction projects and producers with uncontracted volumes will be particularly concerned about being able to “home” their cargoes as projects start-up. With that in mind, opportunities are still significant for both Buyers and Sellers. But what are these opportunities?
One bright spark for producers looking to contract their LNG in the coming years could be new markets and recently opened markets. Excluding growth giants, China and India, 15 markets have opened recently and 10 more could open up in the next decade. See Exhibit 1 below.
Of the ~230mtpa of growth expected in global LNG demand between 2015 and 2030, as much as 60% might come from these recent and likely emerging LNG markets.
The factors leading to the development of these markets will remain in place for some time. In particular the use of floating storage and regasification units (FSRUs). The majority of the most recent entrants are utilizing FSRUs. These redeployable infrastructures can be cheaper and quicker to bring to market than conventional land based regasification terminals and, consequently, allow new LNG based supply chains to be established in a short time.
Ultimately the pace and volume of the development of these recent and likely emerging markets will be impacted by many factors, including
- Economic growth rates and corresponding demand for gas
- Local competitiveness of LNG versus alternative fuels, also in light of environmental regulations
- Regasification and pipeline infrastructure build-out and the associated financing required
- Gas monetization efforts of the global gas industry
In conclusion, given the scale of the potential growth of recent and likely emerging LNG markets, these markets cannot be ignored and rather might present one of the most attractive trade opportunity in the coming years. We will then see LNG sellers actively competing to serve these markets.
About the authors
James Walker is a specialist with Energy Insights in McKinsey's London office.