The liquefied natural gas (LNG) market is heading toward a supply shortage unless investment decisions in new production projects are taken soon, Peter Coleman, Chief Executive of Australian LNG player Woodside said on Tuesday.
“We are meeting at a time of transition for gas. There is an abundance of gas globally and it is understandable buyers may not want to look beyond the short term,” Coleman said at the Gastech conference currently being held in Japan.
“But we need to look over the crest of the hill and it is clear a supply shortage looms, unless investment decisions are taken soon,” Coleman said.
He pointed out that the current conditions “are not favourable” for major investment in greenfield LNG developments.
A range of factors such as geopolitical risk, questions about policies on climate change and taxation, contractual risk and rising funding costs have contributed to this, according to the CEO.
“The upshot is that, globally, only very small volumes have gone to FID in 2016, and 2017 looks set to be another challenging year for the sanction of new LNG projects,” he said.
“Now it is time for buyers to engage again, in recognition that this time of abundance will not last. Those who move first will get access to the most promising projects, offering the most reliable supplies,” Coleman added.
Coleman said he expects new demand for LNG to come from emerging markets that are likely to use floating storage regasification units (FSRUs) as import terminals.
“Imports to countries using FSRUs have already grown from 10 Mtpa in 2012 to almost 30 Mtpa in 2016 amid new demand from countries including Indonesia, Pakistan, Egypt, Argentina, Brazil and Jordan,” he said.
“And that’s set to grow further. Bangladesh, India, the Philippines, Sri Lanka and Vietnam are also considering deploying FSRUs,” Coleman added.
According to Coleman, emerging markets now account for 5% of global LNG demand and that is expected to rise to 27% by 2025.
He also said that the the next wave of demand growth would come from the use of LNG as a transport fuel, in ships and on road and rail.
“The International Maritime Organisation’s announcement of new caps on sulphur content in shipping fuel from 2020 has added momentum to this switch to LNG as a transport fuel. If all the ships in the world converted to lower-emission LNG, that market alone could account for 200 Mtpa.”
“There is room to negotiate flexibility in new contracts”
LNG buyers have been for years urging the need for more flexible LNG contracts, especially when it comes to destination clauses that restrict them from reselling or swapping cargoes.
In a recent move, Japan’s JERA has signed a deal with South Korea’s Kogas and China’s CNOOC Gas and Power Trading & Marketing to secure more flexible contracts.
“If existing contracts are reopened, then other terms may also need to be reconsidered, for example, restrictions on sourcing of supply,” Coleman said.
“The LNG market is rapidly becoming more liquid and transparent, and there is room to negotiate flexibility in new contracts. In 2015, only about 40% of LNG contracts had fixed destination terms, down from 60% for contracts signed up to the year 2014,” he said.
“The move to a more open and fluid market is a welcome long-term development but presents a transitional challenge: how to justify the capital-intensive construction of new supply that will be
needed,” Coleman pointed out.
“We need to have an open conversation about the conditions that caused the current supply overhang in the market,” he said.
“Developers have responded to market needs by reducing cost of supply. We now need buyers to do their part and create new markets,” Coleman concluded.
LNG World News Staff