After a record 70 mill tonnes per annum of new LNG capacity was sanctioned in 2019, at least as much capacity again was lined up for final approval (FID) this year and next.
However, developers, cash-strapped by the collapse in oil and gas prices, have reined in on capital-intensive pre-FID LNG projects.
Woodmac identified three other factors, which will influence LNG demand going forward.
First, the outlook for LNG demand. Woodmac is bullish, anticipating that LNG demand will double over the next 20 years, driven by Asia’s economic growth and increasing penetration – particularly where policy supports gas over coal.
This view isn’t dissimilar to Shell’s in that the LNG market will grow at four times the rate of oil demand in that period. Woodmac’s base case forecasts global LNG demand grows by over 50% from 370 mill tonnes per annum in 2020 to 550 mill tonnes by 2030.
Allowing for projects already under development, there’s a supply gap of 102 mill tonnes to be met by pre-FID projects, which need to be onstream by the end of this decade.
However, the pace and shape of economic recovery is far from clear and so, too, LNG demand growth in the next few years. Longer term, intensifying interest from policy makers and investors in new technologies, including green hydrogen and CCUS, casts doubt on demand growth’s sustainability.
Second, the rising influence of spot LNG prices on project economics. The traditional oil price-linked contracts and firm offtake agreements that have supported the financing of new projects are disappearing. Many projects today rely on equity lifting, with joint venture partners taking the LNG into their own portfolios. The attraction is flexible volumes that can be sold to any buyer and capture the best price.
This also means rising exposure to spot LNG prices. Japan spot LNG prices have ranged from over $11 per MMBtu in 2018 to as low as $2.10 early this year, underlining the volatility and risk in running an open spot gas position.
Third, scrutiny of carbon intensity. ESG has leapt to the top of the agenda for LNG producers and buyers alike. LNG’s track record on emissions isn’t good. Inert gases, including CO2, must be removed before liquefaction and typically are vented into the atmosphere. Liquefaction itself is energy intense, usually fuelled by produced gas.
In future, carbon footprint will be one factor determining how attractive an LNG project is to developers and buyers, and will influence the price it can command.
Among the pre-FID projects which could fill the supply gap include the mega-trains of Qatar’s low unit cost North Field East, which should be sanctioned in the coming months.
This project alone will absorb 32 mill tonnes per year, negating the need for new supply from other sources until the late 2020s and pushing out FIDs for projects elsewhere by two to three years.
In addition, Qatar believes it has another 16 mill tonnes that it could also develop.
A dozen or more projects from Papua New Guinea, Australia, Mozambique, West Africa, Russia and North America, with combined capacity of more than 150 mill tonnes per annum, will also be vying for a share.
Woodmac said that it will be discussing LNG market dynamics, the investment outlook and lifecycle emissions for projects at an Energy Summit (6th to 8th October, 2020).