The stagnation in the market of liquefied natural gas has come to an end: last year saw a doubling of global LNG sales. Meanwhile in Russia, the output of LNG has remained practically unchanged over the past 7 years (10-11 million tons a year), but 2017 may become a watershed when the Yamal LNG project is supposed to go online. The bulk of Russian LNG will continue to go to Asia, and Europe may take an interest in it as well, but breaking out of those two regions into other markets will be hard because of the tough competition from US and Australian suppliers. Rossiyskaya Gazeta writes about it citing a bulletin of the Analytical Center.
In the future the impact of LNG in Europe will become ubiquitous
The experts point out that the tapestry of global natural gas sales is getting more and more complex and for the time being natural gas delivered by pipeline remains the top selling alternative thanks to its high profitability. But as LNG sales continue to rise fast, importers will have to review the terms and conditions of their contracts with pipeline natural gas suppliers more and more often, to make sure they are still getting competitive prices.
Late April and May saw regular reports of new deals being struck in the LNG markets, suggesting there might be increasing risks for the stability of the Russian natural gas exports, the energy bulletin says. Thus, contracts were entered into between the US and Poland and the first tanker carrying LNG will arrive in the Netherlands in June; in addition the US and China declared new LNG agreements with each other. It is too early to run for the hills, though, the experts insist, even though the global LNG market has already begun to change. In 2015, global LNG sales went up 2.7% while in 2016 the growth doubled to 5.3%. According to GIIGNL, 2016 saw sales of 309.5 billion cubic meters of LNG. Estimates of the International Gas Union confirm this trend: sales grew by five percent, which is significantly higher than the average annual growth of half a percent seen over the past 4 years.
The media is paying a lot of attention to sales of US LNG to Europe, but in reality these pale in comparison with the increase in LNG sales within the Asia-Pacific region and from the Middle East to Asia-Pacific. "Over the past several years as major investment projects have been implemented in Asia-Pacific and first of all in Australia, everyone has been convinced that Asia's going to be where it is at in the LNG market, including because high demand has always been in evidence there through high premiums on the European price," the analysts write. "Now the situation has changed: as of April 2017 the premium in the Asian market was just about 10% of the European price and that applies to both long term contracts with the price pegged to the price of oil and spot LNG purchases."
Last year it was China and India that increased their imports of LNG the most, by 9 and 6 billion cubic meters respectively. Both countries mostly buy LNG under short-term contracts and on the spot market and an important factor contributing to the increased demand there was a decrease in the price of natural gas. Demand is also growing in the Middle East where Egypt is the absolute leader (with an increase similar to that of India), followed by Jordan, the UAE and Kuwait. It would be impossible at this stage to argue that the Middle East will end up calling the shots in the LNG market as the main consumer, rather, its role is going to consist of sucking up any additional Middle Eastern LNG output in the medium term, the energy bulletin says.
Sales of LNG from Australia grew by a whopping 46%. Three Australian projects accounted for 2/3 of the global liquefaction capacity, or about 30 billion cubic meters per year. This year Australia is expected to bring another 25 billion cubic meters of capacity online. The US is expected to put into operation even more over the next 10 years: about 75 billion cubic meters. When the first stage of the Yamal LNG project comes online in Russia, our country will be producing 20 billion cubic meters of LNG per year by 2020.
European consumption of LNG remained practically unchanged in 2016, which runs counter to the official rhetoric about how Europe needs to wean itself off its dependence on Russian natural gas and the hype around the sales of US LNG to Europe, the analysts write. This can be explained by the fact that pipeline natural gas still remains highly competitive and that includes the natural gas delivered via pipeline from Russia: throughout 2016, the prices of Russian natural gas in Europe remained close to the prices charged at natural gas hubs and in the fall they actually fell significantly below that level. The new wave of supply is making the risk of a glut in the LNG market in the 2020s more and more tangible and that is going to affect the sales of pipeline delivered natural gas as well. But it is not all doom and gloom for the exporters: so far deliveries of Russian natural gas via pipelines have competed quite successfully with LNG and the growing competition between consumers in the global LNG market is limiting their market power.
China's growing appetite cannot be satisfied with deliveries via the Power of Siberia pipeline alone, and on top of that LNG can also provide more flexibility in deliveries. On the other hand, it is going to be hard for Russian LNG to find customers outside East Asia due to higher transportation costs, which are going to make it less competitive relative to Australian and US LNG."
Analytical Center for the Government of the Russian Federation
As far as Russia's clients in the LNG market are concerned, these are primarily Asia-Pacific countries, the most important of which, South Korea, is already expressing interest in Russian LNG. However, it is going to be China and India that the bulk of the growth in the market is going to come from. "China's growing appetite cannot be satisfied with deliveries via the Power of Siberia pipeline alone, and on top of that LNG can also provide more flexibility in deliveries," Analytical Center expert Alexander Kurdin told a Rossiyskaya Gazeta correspondent. "On the other hand, it is going to be hard for Russian LNG to find customers outside East Asia due to higher transportation costs, which are going to make it less competitive relative to Australian and US LNG."
In part, Russian LNG can be of interest in Europe; however, there it would have to compete on price with Russian pipeline delivered natural gas. That kind of setup could be beneficial for the Europeans as it would promote competition, Mr. Kurdin believes. At the same time, as a rule when there is an influx of LNG, customers tend to be more eager to revise contract terms for pipeline delivered natural gas. "A downward pressure on prices is possible as well as attempts to change other terms and conditions of the contracts. This risk is especially salient in countries that have a well-developed infrastructure for converting LNG to gaseous natural gas, specifically the North Western European countries; however, as the common EU market for natural gas develops and new terminals are built (including in Poland and the Baltic States), the impact of LNG will become ubiquitous all across Europe," the expert concludes.
Source: Rossiyskaya Gazeta