In a new global gas analysis, Wood Mackenzie remarks that despite the outlook for global LNG demand looking increasingly subdued, the number of LNG projects proposed to take a final investment decision (FID) in 2015 and 2016 has not reduced significantly, in contrast to the 45 upstream oil and gas projects which have been postponed FID so far in 2015. If there are no postponements, Wood Mackenzie says the market could see an additional 100 MTPA of LNG sanctioned in the next six-18 months, extending the likelihood of an oversupply of LNG in Asia to 2025.
Noel Tomnay, vice president global gas and LNG research for Wood Mackenzie says: "With the LNG market facing a wall of new supply just as China's gas demand growth has faltered, it is surprising how few new projects chasing a final investment decision (FID) have been postponed."
Tomnay outlines the current market conditions, which are shaping the global LNG market: "Global LNG supply is presently around 250 MTPA and there is a further 140 MMTA under construction. Recognizing that the global market will struggle to absorb such a large supply uptick, for some time now we've been forecasting a soft global market. However that bearish prognosis is now being exacerbated by a demand downturn."
Wood Mackenzie points to Asia and China, in particular, as being key to its revised outlook. Tomnay elaborates: "China's LNG import commitments are set to rise by 17% year-on-year (yoy) between 2015 and 2020, from 20 to 41 MTPA but China will struggle to take all this LNG so quickly. In contrast, China's LNG imports fell by almost 4% YOY in 1H 2015, as a consequence of subdued industrial output and fuel competition, which was driven by relatively low priced oil.
"The outlook for longer term incremental LNG demand growth in China is also being negatively affected. And with lower industrial output and power generation competition increasingly characterizing other key Asian LNG markets, like South Korea, Asian buyers are not in a hurry to finalize new LNG contracts," adds Tomnay. Wood Mackenzie's view remains that the market opportunity for new LNG into Asia does not open up significantly until after 2022, with the key implication being that new project FIDs are not required until 2017 at the earliest.
So have we seen any indications that companies are reassessing investment decisions on LNG projects in light of reduced demand? Tomnay points to an example from February this year: "Recognizing this oversupply BG deferred its proposed US LNG export project at Lake Charles. But BG's postponement has been an exception."
Wood Mackenzie says that thus far most companies are continuing to push ahead with their new LNG projects. "Major project operators including Shell, PETRONAS, ENI, Anadarko, BP, ExxonMobil and Woodside maintain that their projects will take FID before the end of 2016," Tomnay qualifies.
So why haven't more companies followed BG's suit if the market is unlikely to be able to absorb new LNG in the medium to long term? Tomnay explains some of the drivers behind the decision to press ahead: " Postponement could invalidate contracts for the portion of project LNG sold so far, and jeopardize hard-won stakeholder support, including from local communities. Some developers may be worried that a loss of momentum could favor their competitors and that a project postponement may be tantamount to a cancellation."
Wood Mackenzie warns that if company statements are to be believed we will see FID on some 50 MTPA of LNG from the US and a further 50 MTPA from outside the US within the next six-18 months. "Development of even half of this proposed supply could prolong the Asian oversupply to 2025. Wood Mackenzie's view is that the global LNG market does not need all this LNG at the pace proposed and, as companies confront this reality, a raft of project postponements will follow," Tomnay offers in closing.