Is LNG The Next Big Thing? – Part 2

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Royal Dutch Shell

With the growing need to use cleaner and environment-friendly fuels, Liquefied Natural Gas, or LNG, has emerged as a flexible and competitive fuel for a cleaner world over the last decade. In our previous analysis – Is LNG The Next Big Thing? – Part 1 – we had discussed why the LNG industry has grown significantly in the last few years. In this note, we take look at the demand and supply dynamics of the industry and its outlook for the next few years.

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Rising Demand

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With the numerous benefits, both financial as well as environmental, countries worldwide are shifting to natural gas in order to satisfy their energy requirements. While the demand for natural gas has grown at about 2% since 2000, the demand for LNG has out-paced that of gas, expanding at an average annual rate of around 6% over the last 15 years, reaching about 265 MT in 2016. In fact, the demand for LNG has grown so rapidly that the number of countries importing LNG has increased from only 10 at the start of the century to around 35 at present. Some of the new entrants in the LNG import market include Colombia, Egypt, Jamaica, Jordan, Pakistan, and Poland. However, Japan continues to be the world’s largest importer of LNG, with 83.3 MT imports in 2016, despite a drop in its LNG imports due to increased competition from other renewable sources of energy.

Source: Royal Dutch Shell, LNG Outlook 2017

That said, China and India are among the two fastest growing LNG buyers, increasing their imports by 11.9 MT in 2016 only. Since both these countries have decided to move towards a gas-based economy, the demand from these countries is likely to shoot up further in the coming years. Further, the LNG imports from Egypt, Pakistan, and Jordan also grew sharply during the year, as the countries took advantage of the flexibility of LNG supply, importing 13.9 MT in total. This strong demand for LNG imports from new countries was facilitated by the deployment of Floating Storage Regasification Units (FSRUs) off the coasts of importing countries. At present, there are 21 FSRUs in operation that turn LNG back into a gas offshore, then transport it into a country’s grid through existing infrastructure. This provides a relatively quick and commercially flexible solution to the energy demand, as it allows new LNG buyers to swiftly respond to price fluctuations, or to any shortage in their domestic gas supply.

Robust Pipeline of LNG Supply

With increased focus on cleaner fuels, large integrated energy companies such as Royal Dutch Shell have been expanding their presence in the LNG industry. Consequently, a number of LNG projects came online in Australia and the US in 2016, contributing in an increase of about 17 MT in the total LNG exports. Although many industry experts had predicted that the LNG markets will be oversupplied in 2016 due to the additional supply from these new projects, majority of this new LNG supply was absorbed by new LNG buyers such as Egypt, Pakistan, Jordan, etc.

Source: Royal Dutch Shell, LNG Outlook 2017

With the growing demand, the sellers in the LNG markets are adapting to the evolving needs of buyers in order to facilitate trade. For instance, the LNG suppliers are now entering into shorter-term, and lower-volume contracts with new and/or existing buyers to provide them flexibility to trade. Further, the suppliers are ready to carry out business with buyers from developing countries and who have relatively challenging credit ratings. That said, there has been a steep fall in the final investment decisions to create any new supply in the LNG sector.

Outlook 2020

Going forward, the global demand for gas is expected to increase by 2% a year between 2015 and 2030, while the demand for LNG is likely to rise at a rate of 4-5% during the same period. The US is expected to continue to be the leading consumer of gas even in the future, while Russia is likely to be a close second. However, the most significant jump in LNG demand is expected to come from China, as the country’s gas demand is estimated to grow to 450 bcm by 2030 compared to 200 bcm at present. This is largely because the Chinese government has set a target of increasing its gas exposure in its energy mix to 10-15% by 2030, from the current 5%.

Source: Royal Dutch Shell, LNG Outlook 2020

However, the LNG demand from Europe, the region that currently rebalances LNG demand and supply, remains uncertain due to environmental policies, domestic gas production, and pipeline gas imports. That said, since LNG provides a lower emission alternative to diesel and heavy fuel oil, its use in heavy duty and marine transport is likely to expand sharply, particularly in China, the Middle East, Europe, Southeast Asia, and the US. Besides, market experts predict that Southeast Asia, including countries such as Malaysia and Indonesia, that are currently major exporters of LNG, is likely to become a net importer by 2035 due to the rising economic growth and declining gas supply in the region.

On the supply side, as LNG sellers align their operations to meet the needs of the buyers, the LNG market is likely to expand notably in the near future. Based on the projects in the pipeline, the supply growth is expected to increase global LNG trade 50% by 2020 from 2014 levels. One-third of this new supply capacity has already come on-board in 2016 with new projects commencing operations, while the remaining two-thirds is expected to come on-stream by 2020. While this supply may be adequate for meeting the demand requirements over the next few years, the LNG players will need to make large investments to satisfy the demand growth beyond 2020. This could serve as a great opportunity for companies like Shell to increase their foothold and leverage the growth in these markets.

Source: Royal Dutch Shell, LNG Outlook 2020

Thus, we believe that due to the increased focus on the use of cleaner fuels, LNG has emerged as an ideal successor to the existing fossil fuels that are hampering the environment. Going forward, the demand for LNG is expected to increase significantly in the transportation sector, particularly in Asia. While the current pipeline of LNG projects might be sufficient to meet this rising demand, the industry players will need to make new investments in future projects to maintain a sustained supply of LNG beyond 2020.

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