The news came just before the Japanese government said this week that the average price of spot LNG cargoes imported into its country last month was $US7.50/million British thermal units – a nearly 50% drop from $15.10 where it was in the year-ago period.
A total of 113.2 million tonnes per annum of LNG capacity currently under construction or just completed is set to hit the market between 2015 and 2019, including the three Gladstone mega-projects that have already sent their first cargoes.
However, almost 90% of respondents in a Singapore Exchange survey released this week believe that there will be just two or less US LNG projects taking final investment decision this year, thus revealing an undying belief that natural market forces will kick in and correct what some might call an “over-correction” that has hit oil markets.
More than half of the SGX respondents believe that less than a quarter of the currently proposed LNG terminals in the US will be built in the next decade; while there is a clear consensus that there will be a “meaningful” supply growth from Australia in 2016.
In Australia’s traditional mainstay and foundation LNG customer Japan, recent reports highlighted that India’s Petronet renegotiated its contracted prices with Qatar’s Rasgas, as the former had recently been taking lower volumes than its contractual obligations.
Petronet has also revised the pricing structure, moving to a three-month lagged Brent structure, versus the prior 60-month Japan crude Cocktail average, which RBC believes was “the moving of an unusual contract to the industry norm”, as opposed to creating a new industry norm for LNG contracts.
Regional gas pricing hit an extreme over 2012-14 after the Fukushima nuclear incident of 2011 and with the Henry Hub price collapse – a disconnect which RBC said has left those with LNG exposure with the ability to capture “supernormal” profits for a limited time.
Royal Dutch Shell, which is now in the midst of a takeover of UK rival and Queensland Curtis LNG operator BG Group, was at the forefront of this trend.
However, the game has changed following the decline in oil prices in late 2014, since which time oil-linked LNG contracts have turned from an advantage to a burden, while new greenfield LNG project economics appear “challenged”, RBC said.
The LNG market is now evolving, from the buyers’ and sellers’ point of view.
“With a number of Greenfield LNG projects sanctioned over the course of the past few years, we expect near-term supply to outstrip demand to 2020, driven by growth in capacity from Australia and the US in particular,” RBC said.
“In addition to the projects already under construction, a number of projects are currently under study.
“While we do not expect the majority of these to be sanctioned in the near term, in the context of key market demand declining, this has added further to the pessimism around global LNG markets.”
In terms of timing for new start-ups, RBC’s analysis shows that supply additions this year will be more back-end loaded, as although some LNG projects may start up earlier in the year, the typical six- to nine-month ramp-up period for each train means that full capacity will not be on the market until year-end, even for the early 2016 start-ups.
“With 2015 start-ups also back-end loaded, we think commentary around pricing is likely to be bearish in the first half of 2016,” RBC said.
Demand’s mixed messages
Perhaps most startling to major LNG players has been the declines seen in demand for key LNG for the first time in a while.
However, RBC is still “structurally positive” on LNG longer-term, and, in line with most oilers, the firm believes gas demand will grow at a higher rate than oil demand – a welcome respite given West Texas Intermediate crept closer to the dreaded $US30/bbl mark last week.
