INSIGHTS FROM AMPHORA

LNG continues to gain momentum as risk-weary buyers embrace short-term and flexible supply

Amphora provides the first in a series of articles on the fast-changing LNG marketplace. Stay tuned for more articles featuring interviews with industry leaders from countries where demand is set to accelerate in the following decade.

Even in the event of only a modest economic recovery, energy sector observers are predicting buoyant growth in demand for LNG. In August Tellurian CEO Meg Gentle predicted 25 percent growth in the LNG market by 2025. Part of the appeal is that while LNG is still a greenhouse gas, it is a good deal cleaner than other fossil fuels, especially coal. Concerns about an oversupplied market have not dampened demand for LNG, but there is a shift from long-term contracts to short-term and flexible deals.

According to McKinsey analysts, the COVID-19 pandemic has not shaken confidence in longer-term LNG demand: “In the short term, buyers in all regions have reduced their expectations for LNG demand compared with those preceding the pandemic. Most markets saw reduced short-term industrial and, in some cases, gas-to-power demand due to COVID-19 shutdowns, though buyers remain confident in medium- and long-term demand.”

However, McKinsey’s 2020 LNG Buyers Survey, carried out in April, found that despite short-term disruption, buyers remain confident about LNG demand in the medium and long term. In the event of sustained low prices over the next three years, McKinsey found that 90 percent of LNG buyers expect to see a positive market response, particularly in the power sector as gas displaces other fuels, such as coal.

Asian buyers are the most bullish. In July, Gas Exporting Countries Forum (GECF) secretary-general Yury Sentyurin told Petroleum Economist: “Around 71mn t/yr of new LNG export capacity took FID last year – far surpassing 2005’s previous record of c.45mn t/yr of capacity reaching that milestone.”

He predicted: “Asia-Pacific LNG consumers, the destination of 70pc of global imports at present, will remain the largest market and absorb c.700mn t in 2050. We project China will be the world’s first LNG importer to surpass 130mn t. India, with huge investment in infrastructure and the expansion of the city gas network, will, at c.80mn t, become the second-largest LNG importer by 2050.”

In contrast, European respondents expected to see a 100% fall in demand in the short term, with a continuing long-term fall in demand of 22%, according to McKinsey analysts. Their view is that European buyers don’t envisage demand picking up, even with sustained low prices “as a consequence of strong recent demand growth, as low prices have already led gas to displace coal in the power sector – hence the limited additional upside”.

In the short term, buyers in all regions have reduced their expectations for LNG demand compared with those preceding the pandemic. Most markets saw reduced short-term industrial and, in some cases, gas-to-power demand due to COVID-19 shutdowns, though buyers remain confident in medium- and long-term demand.

Global LNG expansion

Across the globe, there are indications of an uptick in interest in LNG. Australia’s government, previously a keen supporter of coal, appears to be wavering and is looking to natural gas to occupy the middle ground between coal and renewables. Research by consultancy Eurasia Group identified Australia as one of the few countries where ‘brown’ stimulus projects – those that add to greenhouse gas emissions, such as coal – exceeded green measures. Others included Brazil, India and the United States. Now, in a softening of its coal-focused stance, the Australian government is now supporting subsidies to boost the natural gas sector.

Climate change has extended the navigation season of the Northern Sea Route (NSR), enabling Russia to deliver its first LNG cargo to Japan that way. In an article for Oilprice.com, Viktor Katona, Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, describes future prospects for Russia sending more and more gas to Japan as ‘intriguing’.

He highlights the consortium of Mitsui and JOGMEC taking a stake in Arctic LNG 2 and Japan’s interest in participating in the Kamchatka trans-shipment terminal: “All of this combined creates a powerful narrative that insinuates the following – the baby steps that we are seeing right now are a harbinger of much bigger things to come.” French, German and Italian energy companies are also supporting development of Arctic LNG 2, which remains on schedule to begin production in 2022. The project includes the construction of gravity-based structures on water and three LNG trains, with a capacity of 6.6 mtpa each.

Buoyant spot market

Financing in the LNG sector remains strong, despite initial knocks from pandemic-related demand fluctuations. We are witnessing a transition from long-term deals to a buoyant spot market for LNG. It might be expected that prices would be lower for a long-term commitment, but that is not the case. Spot LNG prices were 48% and 58% cheaper than FO and LPG respectively in June 2020, reports H-Energy. Spot LNG is expected to remain cheaper in relation to alternative fuels in 2020.

Recently, the large-scale global LNG market has been impenetrable for small, local producers or utilities. Small-scale facilities are possible now and that is excellent news for risk-weary investors who have concerns about the LNG sector’s state of oversupply. The simplicity of small-scale facilities is the draw, with the perception of reduced risk making up for potentially higher prices. In Cyprus, construction of the Cynergy floating storage and regasification unit and LNG terminal has begun. This is a good example of the growing interest in smaller scale, low cost LNG production.

The bottom line is that LNG is competitive with other fuels (including renewables) and long-term demand for it is undiminished. At the same time, buyers are looking for increased flexibility to enable them to respond to a market seeing extreme and unprecedented fluctuation. Flexibility in volumes ordered, in location and delivery and in payments and pricing are all attractive to buyers. Short-term and flexible contracts are increasingly more highly valued than initial market price alone. A real-time view of the supply chain and automated trade finance processes that enable responsiveness is key.

In a market with price fluctuations and oversupply, it is challenging to maintain revenues and manage credit risk management. A single view of the commodity supply chain is vital.

Amphora is a unique provider in today's LNG marketplace. We offer CTRM and Shipping services under one roof, allowing LNG clients to go to market quicker and for significantly lower cost. For more information, please visit amphora.net.

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