Goncalves said that North America’s unconventional oil and natural gas revolution has transformed the traditional gas industry mindset from perceived resource scarcity, recurring shortages and price volatility and risk into a new paradigm of resource abundance, sustained surplus, supply diversity and flexibility, market liquidity and price stability.
However, ballooning oil and gas production, mounting LNG surpluses and plunging oil and gas prices threaten to decelerate, if not derail, the global gas revolution.
This, he said, had unwanted mid-term implications for shale gas production, natural gas prices, natural gas demand, and thus carbon emissions.
“Many LNG buyers, traders, and investors have sought greater supply liquidity, and more affordable and flexible commercial terms. These wishes are now being granted, but it is unclear if the LNG industry can sustain these changes over the longer term,” Goncalves said.
“Doing so will require mastering the new economic efficiency imperatives and bringing new supply to market in an orderly fashion despite the challenging market environment.
“Unless industry participants work to escape the centrifugal forces of the traditional boom-and-bust” investment cycles for natural gas and LNG, the promise unleashed by the shale revolution could be forestalled by a matter of decades or worse.”
He said a buyers’ market had replaced the seller’s market that had dominated for many decades, but that the new abundance’s impact on LNG industry dynamics can still support low-cost natural gas, which is the critical foundation for facilitating renewable energy integration and reduced carbon emissions.
With over 132 bulk cubic metres of gas still to come to market from North America and Australia this decade, in a low price environment, gas stands to win market share from other fuels such as coal, he said.
Goncalves said rapidly-declining natural gas production in Europe and regional de-carbonisation goals represent a golden opportunity for low-cost LNG to capture market share, and in China and India the new buyer’s market affords policymakers greater ability to expand gas-to-power generation.
“Nascent buyers in the Middle East, Latin America and Southeast Asia also have opportunities to increase LNG purchases in quantities unthinkable in recent years when LNG prices were 2-3 times higher and equally inflexible,” he said.
Goncalves said more flexible, short-term markets means the market rebalances more quickly than in the past, and prices have become more elastic, resulting in a convergence of global prices, however there is also a risk to supply and market balance.
“The supply outlook has become uncertain and risky due to the prevailing supply glut and current low LNG prices. As the new US and Australian LNG comes online over the coming years, these trends will deepen,” he said.
“In this environment, liquefaction project sponsors face substantial competition to secure critical long-term contracts from buyers who are increasingly awash in supply offers and options.”
Without new investments the market may find itself in a new period of short supply, high prices, and demand destruction after 2020, Goncalves said.
To break the destructive boom-bust cycle, he said buyers and sellers need to embrace new efficiency imperatives in relation to financing, technology, supply chain optimisation, and marketing and trading.
Goncalves said Russia, Iran, Mozambique and Tanzania are all competing for new market share in the 2020s, when supply is again set to exceed demand, but the US and Canada may have a competitive risk profile, competitive economics and less political risk.
For Australia, which is seeing its LNG dream evaporating with projects such as Browse being left on the shelf, the performance of the current wave of Australian projects coming online before 2020 will be critical to determining whether any of them can be economically expanded.
With a history of cost overruns, technical difficulties, and public opposition and land rights issues limiting CSG production, the current LNG oversupply and low prices have led companies to slash planned investments.
“Despite the currently unfavourable market environment, expansion of Australia’s best-performing LNG projects could provide an attractive source of supply after 2020. The existing projects will benefit from their established infrastructure, regulatory stability, abundant reserves, and close proximity to rapidly growing markets,” Goncalves said.
He said CSG projects, which take years of development drilling and dewatering, may take more time and investment than the current market environment will support, and he was not optimistic for an expansion of the Queensland CSG projects.
The good news is that he says sustained supply liquidity, competition, and price stability are beginning to foster increased confidence in gas market pricing and penetration worldwide, and that should help global LNG demand to almost double in the next decade in both traditional and emerging markets – if the worst excesses of the boom-bust cycle can be averted.
