Thanks to LNG, natural gas is near a turning point

Share

We've had the global oil glut; now here comes the natural gas bubble. Evidence of a looming price plunge in the world's fastest growing fuel is emerging in Asia. It represents more bad news for the coal industry and poses a difficult challenge for British Columbia's efforts to build an LNG (liquefied natural gas) export industry. However, it is good news for energy consumers and for those who worry about the effect of greenhouse gases on a warming planet.

There is too much natural gas looking for buyers and the oversupply is building in Asia where China, the biggest consumer, is seeking to dump excess cargoes of liquefied natural gas on to a saturated market. CNOOC Ltd., a major state-controlled oil and gas importer, has issued a tender to sell two cargoes of LNG for delivery in October-November from Australia's Queensland Curtis LNG project. According to Argus, the energy price assessor, CNOOC's early bid to trim its overloaded forward bookings is just the beginning of an unwinding by China of its LNG import commitments.

Sinopec and PetroChina Co. Ltd. are also believed to have contracted too much LNG, a legacy of China's frantic energy demand growth over the past decade. Natural gas imports expanded at a rate of 14 per cent a year in the five years up to 2013, but slowed to single digits last year as Chinese economic growth slipped into lower gear. In the first half of 2015, LNG import volumes fell by 3 per cent.

The emerging LNG glut in Asia is a consequence of huge investment in LNG export projects in Australia where LNG capacity will triple to 86 million tonnes a year by 2018. Two new facilities, Gladstone LNG and Australia Pacific LNG, are expected to begin shipping cargoes from September, in time for the northern hemisphere winter. The colossal investments, totalling some $200-billion (U.S.), will enable Australia to leapfrog rival Qatar to become the biggest LNG exporter in the world, with potentially dramatic consequences for global energy markets.

This natural gas resource is mobile and tradeable. Unlike traditional piped gas, LNG can be shipped anywhere, its reach only limited by price competition and the cost of transport. The cost of chilling gas into liquid and the specialized tankers needed to ship the fuel kept LNG prices at hefty premiums, reaching $19 per million BTU in February, 2014. However, recently, the price for delivery in Japan has fallen below $8 and market analysts predict a further decline to $6 this winter.

At these levels, Middle Eastern LNG exporters, such as Qatar, will be looking for other markets, such as Western Europe and the Mediterranean. According to the International Energy Agency, the new Australian LNG capacity along with spare LNG capacity in the Gulf will have a knock-on effect in European markets, displacing demand for Russian pipeline gas.

And the competition is likely to increase with new gas resources on the way, notably in Egypt where Italian oil company Eni SpA last month discovered a 30-trillion-cubic-foot offshore gas field. Meanwhile, LNG is opening up a market for stranded U.S. natural gas, with Cheniere Energy Inc. expected to start up its LNG export facility in Louisiana in December. There are five U.S. LNG export terminals under construction and many more planned. None of this bodes well for Canadian plans to build LNG plants on the B.C. coast for export to the Far East.

The global gas market is currently fragmented, a consequence of pipeline delivery and price indexation to other fuels, but LNG is slowly connecting up the dots. That process will now accelerate; the huge differentials between the price of gas in northwest Europe and the United States, represented in the prices Brent crude and West Texas intermediate fetch, will begin to narrow as U.S. exporters begin to sell into peak European demand periods. The introduction of floating storage and regasification vessels will expand the market for LNG and will provide a further incentive for electricity producers to switch from coal to natural gas. Price convergence and the availability of spot cargoes of LNG will encourage the development of spot markets and futures markets.

Thanks to LNG, natural gas is reaching a turning point. If governments grab the opportunity to kill off the coal miasma, the market will expand more quickly as the price dips. But these suppliers must be efficient and capable of competing in more volatile, short-term markets. The lesson of the Alberta oil sands industry must be that heavy investment in a high-cost resource is not a route to sustainable profit. If that is true, the objective of any Canadian LNG producer should be to challenge the lowest-cost producer.

Carl Mortished is a Canadian financial journalist based in London.