Date first published: 05/10/2017
Key sectors: natural gas; oil; renewables
Key risks: n/a
Liquefied Natural Gas (LNG) may be transforming international energy markets. 39 countries currently import LNG, more than double the number only a decade ago. In 2015, 40 per cent of the total gas trade moved by sea, while the International Energy Agency forecasts that seaborne gas will account for more trading than pipelines by 2040.
Natural Gas has myriad applications – it can be used in power generation, manufacturing, heating, and potentially as a transportation fuel. Gas is more environmentally friendly than either oil or coal, but traditionally has been difficult to transport, relying primarily on pipelines that connect two fixed points. Gas’ reliance on pipelines limited the flexibility of whom consumers could buy from and to whom producers can sell. LNG in contrast can, like oil, move by sea and road. LNG’s growth therefore reduces the spread between gas prices globally, thus creating a semi-competitive global market. Concretely, increased LNG trading also may enable the EU to reduce its dependence on Russian-controlled pipelines. Lithuania’s LNG import terminal has given it greater leverage to negotiate over prices with Gazprom, while Poland could replace Russian gas with cheaper and less politically-sensitive alternatives.
LNG’s expansion can be attributed to several factors. Firstly, gas prices have been falling on the back of new discoveries. Shale gas production has rocketed. Increased US production in particular and the relaxation of export restrictions by the Obama Administration have pushed down global energy prices. Supply is likely to increase further as Qatar, the holder of the third-largest natural gas reserves in the world, ended its moratorium on drilling in the Northern Dome. Doha hopes to expand production by 30 per cent by 2024.
Increased supply has rebalanced power away from producers to consumers. Contracts are no longer as rigid, and provisions that limit resale are being renegotiated. The LNG market may then come to resemble the oil market, where cargoes are traded multiple times before it reaches the final destination. The price of LNG will thus likely fall further.
Secondly, two-thirds of the cost of producing comes from the cost of LNG infrastructure. A handful of major operators have specialised in the construction of export and import facilities, but have only been willing to do so if their customers agree long term take-or-pay deals. In the early days of LNG trading, only developed countries, like Japan, could afford giant facilities and were willing to sign expensive long term contracts. The cost of building terminals have come down slightly, and over 28 are under construction. More important is the development of floating storage and regasification units. Offshore terminals take around 2 years to build compared to around five for onshore terminals, can be moved in the event of non-payment, and cost around a quarter of the price of developing onshore facilities. There are 25 offshore terminals today, and new projects are underway in countries such as Bangladesh, Pakistan, and Namibia.
There will be challenges to the continued expansion of LNG. Increased consumer power may increase demand, and could weaken the willingness of suppliers to invest in new facilities. Even with prices as low as they are now, LNG is still more expensive for developing countries than coal. Renewable energy may become more price competitive than LNG, and thus supersede it as vital in the global energy mix. Nuclear power, which is expanding in China and India, could also be a threat to the mass expansion of the LNG market.