Despite low oil prices and a weak medium-term outlook, LNG has a bright future
June 2015 | Kerri Maddock, Peter Lambert
Much attention has been paid recently to LNG demand and supply dynamics, and the imLNG markets need a further +65mtpa of capacity to take FIDs this decade to avoid a tight market by the mid-2020s
Despite low oil prices and a weak medium-term outlook, the LNG market has a bright future. There is the need for ~15 new LNG trains by 2025 and over double that by 2030. Players should look past the structural loose market in the medium term and push ahead with FIDs for this growing market.
A new wave of LNG export capacity is on its way to the global market by 2020: 115mtpa of capacity already post- FID or under construction will start to bring volumes to market in the next five years (and a further 15mtpa by 2022). On balance, supply in the LNG market will increase by 40% between 2015 and 2020 – the largest volume increase in supply the market has seen in any 5-year period.
Given the current demand outlook however, in the next 5 years, Asian demand growth is unlikely to be strong enough to absorb all of this new capacity. The market looks likely to be structurally long until 2022 (however weather effects could eliminate some of this in the next two years). For the market to stay balanced, volumes which have been diverted out of Europe to Asia will instead flow back to Europe, re-exports will slow, and price-sensitive consumers will step in to take advantage of LNG below its full cycle costs. The result of the change in trade flows suggests that LNG spot markets will trade much closer to European price levels, instead of close to oil price parity prices seen during tight market conditions.
Longer term however, LNG markets have a much more positive outlook. Demand is expected to grow on average between 4-6% p.a. until 2030, with our base case expectation at 4.5% p.a. between 2015 and 2020. Given this long-term demand outlook, the market needs to take FIDs on a further ~20mtpa of capacity in the next ~2.5 years to bring it to market by 2023, and a further 45mtpa by the end of the decade so it’s ready for 2025. Otherwise from 2023, we quietly enter a very tight global LNG market.
The race is on for which global projects will fulfill this increasing demand. Our article Brownfield expansion projects in pole position in US LNG market highlights that US brownfield projects have a competitive edge compared to other purposed projects globally. However, there are portfolio diversification, security of supply, and political considerations that might help keep global projects in Australia, East Africa, and elsewhere viable. Some consumers will want to diversify both their pricing exposure (Henry Hub vs Oil indexed) and their dependence on any single country for a high proportion of their energy needs. For example, for the US to fill half of the needed non-FID capacity, this would mean all major LNG consuming countries would need to rely on the US for upwards of 30% of their supply. In 2013, Qatar, the largest LNG supplier, met only 25% of demand of the three largest consumers (in total, Japan, Korea, & China) and only Korea allowed itself to take more than 30% of its supply from Qatar (Korea took 34% of its supply from Qatar though ~6% was on a spot basis).
Overall the US is not going to fill the entire market supply need in the longer term – so don’t count out Australia, East Africa, and other players from this race. The market could absorb US export capacity at 60% higher than what has already taken a FID and still need well over 100 mtpa of capacity to meet demand.
About the authors
Kerri Maddock is a Senior Analyst in Energy Insights' London office, Peter Lambert is a Senior Expert in McKinsey's London office.