"Who blinks first?" was the question asked by the International Energy Agency (IEA) of the price showdown between Asian buyers of liquefied natural gas (LNG) and their global suppliers.
The IEA was seeking an answer to which group has the most power: the buyers who want lower LNG pricing as well as flexibility and diversity of supply, or the producers who need guaranteed high prices for long-term contracts to justify the capital investment in building new plants.
While the IEA's Medium-term Gas Market Report, released on Tuesday, is probably correct in saying the issue has yet to be decisively settled, the answer is already largely known.
The buyers are likely to win in the short to medium term as the wave of new LNG supply, largely from Australia and the United States, comes to market, thus easing the current tightness and boosting competition among producers.
But buyers are equally likely to lose in the longer term, beyond 2020, as new LNG projects are going to struggle to obtain the necessary financing and simply won't get built.
However, it's neither buyers or suppliers of LNG that will blink first, rather it's bankers and they are already treading cautiously and are unlikely to lend the billions of dollars needed for new projects, unless a high price is guaranteed.
The IEA expects natural gas demand growth in the next five years to be led by Asia, with the region consuming an additional 250 billion cubic metres (bcm) by 2019.
This will be led by China, where demand is expected to double to 315 bcm.
While increased domestic output and pipeline from Russia and central Asia will bolster Chinese supplies, the IEA still expects LNG to make a significant contribution.
About 100 bcm of additional LNG demand will come from Asia in the next five years, a gain equivalent to about a third of the total LNG market of 322 bcm in 2013.
The 100 bcm of additional LNG required can be mostly met from the plants that are already under construction.
Australia's seven LNG projects currently being built will deliver 61.8 million tonnes per annum, equivalent to about 84 bcm, while Cheniere's Sabine Pass, the only U.S. project being built, will add 24.4 bcm.
Other new projects in Russia and Africa will ensure that the LNG market will at worst be balanced and most likely will have a small surplus in the next five years.
NEW APPROVALS NEEDED
However, as the IEA points out in its report, LNG demand won't suddenly stop growing in 2020, and given the lead time of at least five years, projects will have to get approval soon in order to start up from 2020 onwards.
Since the wave of approvals in Australia for current plants, there has been a dearth of new final investment decisions, with the IEA pointing only to Yamal LNG in Russia.
Australian LNG producers have been arguing in recent months that the country will miss out on the next round of approvals unless costs can be cut.
Even if labour and regulatory costs do come down, it's still questionable as to whether greenfield LNG projects can get a green light, and not just in Australia.
The $400 billion deal between Russia and China to supply 38 bcm of natural gas a year has been widely interpreted as setting a new benchmark for what the Asian market can pay for gas.
Although the price wasn't disclosed, sources have put it at around $10 per million British thermal units (mmBtu), close to what Russia receives for supplies sent to Europe.
However, this is well below the LNG price in Asia, with spot currently at $13.10 per mmBtu, a level likely close to the seasonal low. The peak so far in 2014 was $20.50 and an average of around $16-$17 for the year seems likely.
If LNG buyers insist on prices more closely aligned to the Russia-China deal, or to U.S. Henry Hub, they may well be successful in driving costs down as producers compete to sell spot cargoes.
However, any success in lowering LNG costs will merely ensure that new projects don't get built, as a delivered to China price closer to $10 per mmBtu would likely render even the planned plants in the United States uneconomic, despite the lower cost of their shale gas feedstock.
While all LNG buyers say they want lower prices, it may turn out that in the longer term the smart buyers are those that are still prepared to pay more for secure multi-year contracts, especially for deliveries after 2020.
Source: Reuters
The IEA was seeking an answer to which group has the most power: the buyers who want lower LNG pricing as well as flexibility and diversity of supply, or the producers who need guaranteed high prices for long-term contracts to justify the capital investment in building new plants.
While the IEA's Medium-term Gas Market Report, released on Tuesday, is probably correct in saying the issue has yet to be decisively settled, the answer is already largely known.
The buyers are likely to win in the short to medium term as the wave of new LNG supply, largely from Australia and the United States, comes to market, thus easing the current tightness and boosting competition among producers.
But buyers are equally likely to lose in the longer term, beyond 2020, as new LNG projects are going to struggle to obtain the necessary financing and simply won't get built.
However, it's neither buyers or suppliers of LNG that will blink first, rather it's bankers and they are already treading cautiously and are unlikely to lend the billions of dollars needed for new projects, unless a high price is guaranteed.
The IEA expects natural gas demand growth in the next five years to be led by Asia, with the region consuming an additional 250 billion cubic metres (bcm) by 2019.
This will be led by China, where demand is expected to double to 315 bcm.
While increased domestic output and pipeline from Russia and central Asia will bolster Chinese supplies, the IEA still expects LNG to make a significant contribution.
About 100 bcm of additional LNG demand will come from Asia in the next five years, a gain equivalent to about a third of the total LNG market of 322 bcm in 2013.
The 100 bcm of additional LNG required can be mostly met from the plants that are already under construction.
Australia's seven LNG projects currently being built will deliver 61.8 million tonnes per annum, equivalent to about 84 bcm, while Cheniere's Sabine Pass, the only U.S. project being built, will add 24.4 bcm.
Other new projects in Russia and Africa will ensure that the LNG market will at worst be balanced and most likely will have a small surplus in the next five years.
NEW APPROVALS NEEDED
However, as the IEA points out in its report, LNG demand won't suddenly stop growing in 2020, and given the lead time of at least five years, projects will have to get approval soon in order to start up from 2020 onwards.
Since the wave of approvals in Australia for current plants, there has been a dearth of new final investment decisions, with the IEA pointing only to Yamal LNG in Russia.
Australian LNG producers have been arguing in recent months that the country will miss out on the next round of approvals unless costs can be cut.
Even if labour and regulatory costs do come down, it's still questionable as to whether greenfield LNG projects can get a green light, and not just in Australia.
The $400 billion deal between Russia and China to supply 38 bcm of natural gas a year has been widely interpreted as setting a new benchmark for what the Asian market can pay for gas.
Although the price wasn't disclosed, sources have put it at around $10 per million British thermal units (mmBtu), close to what Russia receives for supplies sent to Europe.
However, this is well below the LNG price in Asia, with spot currently at $13.10 per mmBtu, a level likely close to the seasonal low. The peak so far in 2014 was $20.50 and an average of around $16-$17 for the year seems likely.
If LNG buyers insist on prices more closely aligned to the Russia-China deal, or to U.S. Henry Hub, they may well be successful in driving costs down as producers compete to sell spot cargoes.
However, any success in lowering LNG costs will merely ensure that new projects don't get built, as a delivered to China price closer to $10 per mmBtu would likely render even the planned plants in the United States uneconomic, despite the lower cost of their shale gas feedstock.
While all LNG buyers say they want lower prices, it may turn out that in the longer term the smart buyers are those that are still prepared to pay more for secure multi-year contracts, especially for deliveries after 2020.
Source: Reuters
