May 2016, Vol. 243, No. 5
Features
Outlook: Gas Market, Full Steam Ahead
Significant changes loom over the global gas and liquefied natural gas (LNG) market in 2016, as emerging players backed by huge reserves start to elbow established suppliers aside. Will a sanctions-free Iran, home to the world’s second-largest gas reserves, realize its regional supply agreements? And how will Qatar, the world’s largest LNG exporter, react now that both the U.S. and Australia are capable of stealing its crown by 2020?
Questions abound, but there is a level of consensus among energy professionals. It is likely that there will be a rise in LNG spot market activity in the three primary hubs over the coming year; Europe, the Middle East and Asia and the U.S. Prices are expected to stay depressed by the oversupply throughout 2016 at the very least, but most likely until 2019 as an already abundant supply is swamped by volume from emerging suppliers, notably the U.S. and Iran.
The LNG market is expected to continue the growth it reported in 2015, despite weakened demand and the impact of the oil price crash. LNG production hit 250mn metric tons (m/t) last year, rising by 4mn m/t on 2014, according to Wood Mackenzie. The consultancy cautions that a further 125mn m/t of LNG under development means that the majority of market growth will come after 2016.
New supply contracts, such as the 5.8mn m/t of LNG for Jordan, Egypt and Pakistan in 2015, are expected to be supplied via fast-tracked floating storage and regasification units (FSRU) – rising competition means plugging into new markets quickly will prove key. Overall, the future for gas, in pipeline or LNG form is still bright.
U.S. Market Awakens
The first LNG exports in early 2016 from the U.S. Sabine Pass marked a key milestone; it signifies another surprise move in the U.S.’s journey from an energy importer to an exporter and it will spark a shift in the global market dynamics. Conservative estimates put the U.S. as one of the world’s top LNG suppliers by 2020, coming third to Qatar and Australia. A wave of mega LNG infrastructure projects is also underway in the U.S.
The export of Henry Hub-linked gas from the U.S. could allow Henry Hub to emerge as the global price marker, while the geographic convenience and underused import infrastructure in Europe could tempt U.S. exporters to the continent. The U.S.’s new LNG market is also expected to find clients within the Pacific Rim and possibly even the Far East via the newly expanded Panama Canal.
Iran Wades Back In
Iran, home to the world’s second-largest gas reserves, has long declared it will be a major gas and LNG supplier as soon as sanctions were reversed. The P5+1 lifted sanctions on Jan. 17, loosening Tehran’s economic shackles. Now, all eyes are on how quickly Tehran will be able to take action on its gas memorandums of understanding (MOUs) with Oman, Turkey and Europe.
Within Central Asia, a sanctions-free Iran means that the 2,700km Iran-Pakistan-India gas pipeline – first touted in 2002 – could finally gain traction. Indian and Pakistani energy officials say the vast economic and societal benefits of the pipeline through their lands could override their fractious relationship. However, given Pakistan’s proximity to Iran it is likely they will be the immediate beneficiary of Iranian pipeline gas long before India.
In addition, such energy infrastructure plans demand complex and vast infrastructure, which in turn demands equally vast investments – both will take time. Political and economic clarity surrounding Iran’s gas MOUs and pipeline projects is likely in 2016, but the country will not be a contender for Qatar’s crown for a while.
Australia’s Quiet Boom
Australia is getting ready to become the world’s biggest LNG exporter by 2018, with the country ramping up its capacity to satisfy growing Asian demand. Although Japan’s net imports of LNG will likely reduce over the medium term, due to the bringing online of more of its nuclear reactors, Australia is ideally placed to provide more LNG in the future, but price will be the big decider here.
Australia’s plans to widen its Asian client portfolio in 2016 has had a strong start, with a tentative agreement by the country’s largest gas project, Gorgon, to fulfill a LNG supply contract to China. The 10-year deal from 2018 will supply around a half million tons per year. Like all LNG exporters, Australia will have to navigate the slight softening in Asia’s demand, with Wood Mackenzie seeing demand fall to 245mn m/t as natural gas production rose to 250mn m/t in 2015.
Russia Juggles Politics
Russia will push to retain its spot as a top regional gas supplier in the year ahead, but geopolitical issues in Europe, Ukraine and Turkey muddy the country’s potential. The weakening relationship with Europe, illustrated by Europe’s frequent and oft-empty threats to curb the relationship, puts Moscow under renewed pressure to improve its public relations strategy.
The emergence of U.S. LNG exports could tempt Russia’s traditional customers to look westward where supply contracts may not be so bogged down in political turmoil. Lithuania, for example, has signed supply agreements with U.S. LNG exporters, including Cheniere Energy. Still, the marginal costs for Europe to seek additional imports from Russia should sharpen Moscow’s competitive edge.
Russia’s gas players could always carve out homes in China and wider Asia, but the region’s appetite is expected to be slightly subdued in 2016 and Australia and the Gulf have largely cornered that market.
Green Credentials
As the Middle East and beyond ramp up their awareness of the economic and environmental benefits of exploring renewable energy, gas is increasingly replacing the use of oil and coal for power generation. Natural gas production, which many argue is a ‘clean’ non-renewable, will become increasingly popular under the umbrella of green directives laid out by ever-evolving green energy policy.
The shift in Gulf countries’ thinking was demonstrated by their unprecedented interest to participate in the Paris Agreement at the Cop 21 climate change conference in December 2015. While not legally binding, those that signed the agreement committed to keeping the global temperature rise below 2 degrees Celsius and to limit the temperature increase even further to 1.5 degrees Celsius above pre-industrial levels. Meanwhile, Europe’s conversion of existing generation boiler plants into gas, or biomass firing could help ease the oversupply of gas in the medium term and help buoy prices.
Author: Sean Evers is founder and Managing Partner of Gulf Intelligence, a strategic communications agency and an Energy and Finance think tank. He is a graduate of Notre Dame University in South Bend, IN.
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