Massimo Di Odoardo, Vice President, Global Gas and LNG, Wood Mackenzie writes about the increasing number of projects being commissioned
The last 18 months have been transformational for the LNG industry. After years of concerns about an upcoming oversupply, the market now looks like it will need new LNG soon.
Improved outlook for LNG demand
Unsurprisingly, China is making the headlines, where a massive coal-to-gas switching programme targeting the residential and industrial sectors started in April last year. Liquefied natural gas demand grew 45 per cent in 2017 and another 50 percent in the first half of 2018. This puts China on course to leapfrog Japan to become the world’s biggest LNG importer this side of 2020.
But the demand story is not just about China. In South Korea and Taiwan, concerns about nuclear production and pollution are pushing governments to pursue more pro-gas policies. While in Pakistan and Bangladesh, significant LNG imports will be required, much of that simply to replace declining domestic production.
Europe too will soon need to step up its LNG imports. Europe's import dependency has increased by 65 billion cubic metres (cm) per annum since 2014. With many European governments determined to reduce coal and nuclear capacity and with indigenous production continuing its decline, Europe will need to import an additional 80 billion cm by 2025. But Europe’s supply options will be limited in this timeframe. Russian pipelines into Western Europe are maxed out and Nord Stream 2 will only offer limited additional capacity, as it being designed to re-direct flows to central and southern Europe. Consequently, Russian exports will increase further compared to record levels seen in 2017, and Europe will need to more than double LNG imports by 2025.
New LNG supply required
Improved market dynamics, including higher oil prices, have changed the outlook for the LNG industry. Firstly, fears of an oversupplied LNG market in the medium term have reduced.
There is still more LNG supply currently being developed than Asian demand can absorb over the next two years. But this extra supply is less than previously anticipated, so, crucially, there is now enough market space in Europe to absorb this and maintain Russian exports at relatively high levels. This means that prices might well soften through to 2020, but will remain relatively strong.
Secondly, it means that the market will require new LNG supply soon. With LNG demand continuing to increase and LNG supply lagging behind because of the lack of FIDs over the last years, we expect the market to require new supply as soon as 2022. Wood Mackenzie expects the market will need as much as 65 million tonnes per annum by 2025.
Race to sanction new LNG projects back on
With timing to build a new LNG plant averaging between four to five years, the race to sanction new LNG projects is back on.
Indeed, there are plenty of options to deliver new LNG supply. Several projects with an annual capacity totalling more than 100 million tonnes per annum have been proposed in the US. Qatar, currently the world’s largest LNG supplier, has announced plans to add three new mega-trains with capacity totalling nearly 25 million tonnes per annum, and new projects have also been put forward to monetise giant reserves in Mozambique, Russia, Australasia, Canada and West Africa.
But despite the industry’s optimism, the most advanced LNG projects are finding it difficult to take the final investment decision (FID) in 2018. Only one project - Cheniere’s Corpus Christi Train 3 in the US - has taken FID so far. BP’s Tortue floating LNG project in Mauritania also looks likely to take FID in the fourth quarter, while 2018 remains a target for Shell’s giant LNG Canada project as well as for the Qatar Petroleum and ExxonMobil-led Golden Pass project in the US.
But 2019 will be a record year for LNG investment when giant new projects are likely to start construction in Russia, Mozambique the US and possibly Qatar.