The role of gas demand creation in absorbing upcoming LNG supply surplus
February 2017 | Harrie Beek
LNG demand creation opportunities may be the answer to what most industry experts and institutions agree looks like a developing global LNG supply glut over upcoming years. Africa, Asia, and Latin America have great demand growth potential if regulatory actions support gas (e.g., a coal to power shift in China), infrastructural developments continue to open up energy-consuming sectors, and LNG prices remain competitive.
Exhibit 1: The LNG market is expected to be oversupplied through 2024
Source: McKinsey Energy Insights' Global Gas Model, Rystad Energy
By now, it is industry consensus that from 2017 to 2023 the market will remain long, with demand not expected to keep up with capacity additions. McKinsey Energy Insights projects the average oversupply to be ~58 bcm between 2017 and 2023. And, while the oversupply in the LNG market will peak at “only” around 2.2% of total global gas consumption (82 bcm of ~3,700 bcm in 2019), this “flexible” LNG supply will continue to support a change in the global pricing dynamics. Changes in global pricing dynamics being increasing hub based sales, global price convergence, and possibly lower prices.
China has great potential to absorb a large share of the surplus volumes from 2018 onwards. In an upside case, additional demand creation in China and a selection of established but expanding gas markets in Asia and South Africa could easily absorb more than 50% of the entire LNG glut from 2019 onwards (see Figure 2).
Exhibit 2: With additional and accelerated demand creation, China and other selected expanding gas markets can absorb >50% of the supply glut from 2019
Source: McKinsey Energy Insights’ Global Gas Model, Rystad Energy
China pushing gas forward
For example, analysis shows Chinese buyers could in an upside scenario take at least an additional 40 bcm/year above the base case demand in 2020.
To decrease air pollution, China has set an ambitious target for gas to reach a 10% share of total primary energy consumption by 2020. To achieve this goal, China will require a supply increase of 60–120 bcm from current levels, compared to a base case for demand of about 300 bcm by 2020. If it manages this rise, China alone will have enough demand response to completely clear the global LNG market oversupply.
Let’s consider a more moderate upside case—in which the Chinese government drives the increase of gas penetration by pushing decisively forward with gas market reform (e.g., opening up infrastructure and driving market pricing) but does not introduce any costly subsidy schemes (e.g., for coal to gas switching). In this scenario, one can expect a potential incremental rise in gas demand of about 40–70 bcm/year on top of current base demand by 2020.
Developing nation boom
A simple analysis shows that an acceleration of gas development in new and established gas markets in developing countries like India, Bangladesh, Vietnam, Pakistan, and South Africa could add an additional 15–20 bcm/year of demand from 2018. The main drivers of this additional demand will be (1) rapid expansion of LNG receiving capacity by a strong push from regional players like Petronet, Petronas, Pertamina, and PTT across south and Southeast Asia; and (2) LNG-to-power projects like South Africa’s “Gas to Power Programme” for 3,000 MW of new gas-fired power generation.
Additional upside potential comes from recent technological developments, such as micro-LNG, floating regasification units (FSRUs), and floating power barges, which are reconnecting (partially) stranded power assets and opening up new pockets of demand in a variety of countries. India, for example, in 2015 had 24 GW of (partially) stranded gas-based power assets , which could translate into more than 10 bcm/year of additional demand if reconnected using FSRUs.
On top of this, the same smaller scale, more flexible regasification options could be used to access new, currently unserved markets including Ghana, Colombia, Puerto Rico, the Dominican Republic, the Virgin Islands, Guadalupe, Martinique, Guatemala, Uruguay, Chili, Sri Lanka, Ivory Coast, Benin, Morocco, Senegal, and Namibia. These markets would benefit from security of power supply and flexibility, as they will be able buy LNG on a flexible/spot basis and switch to alternative fuels in times of LNG market tightness.
Absorbing the glut with Asian demand
On the surface, Europe might look like the ideal candidate to absorb the surplus supply, as it has enough regasification capacity already in place to accommodate the entire surplus. However, low-cost pipeline suppliers in Russia, Algeria, and Norway will continue to deliver at least at take-or-pay level , into what most forecast will be a shrinking or stagnant European gas market. On top of that, Russia is actively trying to expand its volumes into Europe.
China and a number of developing countries can play an important role in absorbing at least part of the expected LNG surplus volumes. Demand has risen above expectations already over the last 6–12 months, with China, India, and many smaller countries speeding up buying as they take advantage of relatively low LNG prices to replace highly polluting coal. That and cold weather have pushed LNG prices up this winter, absorbing early surpluses and raising questions over some of the more price-sensitive incremental demand.
(1) In their Energy Development Strategy Action Plan for 2014–2020
(2) Based on IL&FS Energy Development Company’s publication
(3) Assuming plant runs 2,500 hours per year
About the author
Harrie Beek is a Senior Analyst with Energy Insights in McKinsey's Kuala Lumpur office.