While oil is still suffering the effects of oversupply, another supply bubble is growing – gas. Or more specifically, LNG. It is a problem the entire industry can see coming, and is already flipping power from the industry’ sellers to buyers.
What’s the appeal in LNG? Natural gas requires extensive pipeline infrastructure to pipe from source to consumption, so travelling long distances – say from Australia to Japan - is untenable. However, that natural gas can be supercooled into liquid form, then placed on a LNG tanker to be shipped across the world. It opened up natural gas to markets that wouldn’t otherwise have access to it, diversifying energy mixes and being a cleaner-burning fuel as well. It was this that got Japan started on LNG in the 1990s, an addiction that has spread across Asia. So hungry was Asia for the fuel, that it created a sellers market where buyers were locked in 15-, 20- and longer contracts at high prices, because, where else would they get their LNG from?
This expectation of captive damage fuelled the LNG boom over the last decade, triggering a race for Asia. Australia, with its vast gas reserves in Western Australia, was closest. Canada’s gas reserves in British Columbia were also well-positioned to serve Asia. The Middle East, in particular Qatar, also got in on the game, along with Asian sources like Indonesia and Papua New Guinea. The US would have joined, but the shipping lane – which required circling around Tierra del Fuego at the southern tip of the continent – incurred too much shipping costs, so it focused on the Atlantic Basin. The prize was long-term contracts with the Japanese and Koreans at high fixed prices, and a plethora of profits.
Herd mentalities create bubbles, and as more and more players joined the fray with more and more gas discoveries – Africa and recently, Israel, are some of the new players – it was always assumed that Asia would be ready to absorb it. It is not. The market is already in a glut, and Wood Mackenzie predicts that the oversupply will peak at 60 million tons per annum in 2019, based on current operational and announced projects. Yet more projects are still being announced. And the widening of the Panama Canal now brings US LNG to Asia too.
It’s a situation eerily similar to the oil market. Except in oil, there is OPEC and as diminished as its powers are today, it still wields significant clout that a statement by OPEC to curb output can send oil prices rallying. The Gas Exporting Countries Forum (GECF) has nowhere near such influence or power, nor do they have a swing producer equivalent of oil’s Saudi Arabia. And as with oil, much of the new LNG export capacity – up to 100 mtpa under construction in the US and Australia alone – is in private hands, not subject nor interested in an oligopoly.
So the glut continues and buyers are spoilt for choice. Japan and India are already moving to renegotiate the strict contracts that left them locked into supplies that they may not need and cannot resell. Japan, indeed, predicts that it will have enough excess LNG coming into its system to establish an LNG trading hub, an ambition echoed by Singapore and South Korea, which will add more transparency to the market to the detriment of sellers.
A crash is waiting to happen in the LNG market. There is far too much supply and even as the supply glut forces prices down, there is still too much to be absorbed, not only in Asia but the rest of the world. And when it happens, it will impact not only the gas producers, but shippers and construction firms as well. It is a good time to be a buyer; as a seller, it is time to consolidate, be cash-rich not debt-heavy and prepare for a rough future. The current crisis in oil is a glimpse of a future that LNG-linked players need to prepare for.
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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