Global LNG Outlook 2H 2018
Global LNG Outlook 2H 2018
Setting the scene
The shale revolution is leading the world to a future of abundant and affordable oil and gas.
The technology of liquefying natural gas is increasingly used to ship the fuel to regions where demand is growing, driven by economic growth, efforts to reduce air pollution, and depletion of local production.
Structural changes in power markets and competition from substitutes require more flexible supplies of liquefied natural gas (LNG) in terms of volume, destination and pricing.
The role of emerging markets
According to our 2H Global LNG Outlook, imports of LNG will set a new record this year on the back of a robust 8.5% growth - demand will reach 308MMtpa this year, up from 284MMtpa in 2017.
Half of the 24MMtpa of growth will come from China and the remainder largely from Japan, South Korea and India. The anticipated global supply surplus is likely to be modest and brief over 2020-21.
The use of LNG in the industrial and transport sectors in Asia, where environmental concerns are on the rise, will push up gas demand.
Furthermore, the opportunity for LNG in baseload power will be mostly in floating storage and regasification-based emerging markets that are plagued by power shortages.
By 2030, 450MMtpa of LNG is needed, driven by Asia, which accounts for 86% of total growth.
Demand growth will slow significantly in 2020 when China starts to receive Russia pipeline gas and Japan’s ninth nuclear plant restarts. After that, demand growth will recover and remain steady with South and Southeast Asia becoming the key drivers.
We have cut our long-term forecast on European LNG demand (including Turkey) to 60MMtpa by 2030.
John Twomey, head of European gas analysis, said: “The growth of renewables and batteries will marginalize gas-fired generation in the European power system. This will restrict the growth of LNG imports, despite declines in Dutch and Norwegian gas production. Europe will limit its reliance on Russian pipeline gas imports.”
On the supply side, 104MMtpa of new capacity will be added globally during 2018-21. With two new final investment decisions (FIDs) taken in 1H 2018, global post-FID supply capacity will peak in 2021 with 392MMtpa.
About 17 projects will likely take FID in the coming years, potentially adding 172MMtpa of supply capacity by 2030.
Global LNG Outlook, Bloomberg NEF
Selling new LNG term contracts continued to be challenging, as only 7.1MMtpa of supply contracts were signed in 1H 2018.
The share of short-term (1-4 years) contracts went up to 41%, up from less than a quarter over the last decade. This indicates buyers’ increasing preference for shorter tenure.
New contracts to underpin final investment decisions (FIDs) on new supply projects will also need to take place by 2021 to provide sufficient supply capacity post-2025.
Although more supplies are expected in the coming months from new export projects, winter spot prices will likely surge due to resistant oil prices, peaking heating demand, and the U.S. – China trade war.
Anticipated overcapacity would mostly add downward pressure in 2020-21.
BNEF's Global LNG Monthly provides a holistic account of the monthly global LNG trade and the changing market dynamics. Learn more here.
104MMtpa of new capacity will be added globally by 2021
Rising oil prices and surging LNG demand in North Asia in the past year have reignited developer interest in LNG supply projects. Some 27 LNG projects are now targeting final investment decisions (FIDs) in 2018-19.
Our assessment shows that:
- Only 11 projects have a greater than 50% chance of getting the go-ahead, deemed "highly likely and likely", in the next 18 months.
- An additional 6 projects are considered "likely" to take FID in the coming years and come online by 2030 based on our long-term likelihood assessment.
Of all “likely and highly likely” FIDs, half are North American, with the remainder from Qatar, Africa, and Oceania.
China’s announcement of a 25% tariff on U.S. LNG imports complicates the laborious process of making an FID for U.S. projects. The rift gives room for non-U.S. projects to move in.
If all "likely and high likely" rated pre-FID projects get built, the global LNG market may provide 557MMtpa of capacity and looks to fall into another phase of supply glut even under a high-case demand scenario.
This makes it even more of a race to FID for these projects. Projects that do not FID soon will find themselves in an overcrowded market later.
U.S. export capacity will double by 2030 with new supply. Of the 15 projects in the U.S. that have said they are targeting FIDs in 2018-19, seven amounting to 90MMtpa will probably make the cut before the end of 2019.
Unit costs for Gulf Coast projects range between $420/ton and $640/ton.
The growth of demand in Asia and a further drive to cut the cost of U.S. LNG will likely lead to some new sales and purchase agreements for U.S. LNG.
“About 90MMtpa of ‘likely’ FIDs in the next few years are from North America, mostly in the Gulf of Mexico.”
Anastacia Dialynas, Lead LNG Analyst, Americas, BNEF
Expansion projects in Qatar, Papua New Guinea, Nigeria, Western Australia and Russia are the front-runners to FID in the rest of the world.
Mozambique is set to lead development of greenfield projects, with Anadarko's 13MMtpa of Mozambique LNG project on track. In addition, a couple of small floating LNG projects are likely to move ahead in Western Africa.
Qatar continues to be a low-cost producer with no concern about declining gas supply after a moratorium was lifted on the liquids-rich North Field.
Mozambique is a leading developer of greenfield onshore LNG liquefaction facilities. Two different onshore LNG facilities are proposed: the plants are starting off with two trains each, representing 6.44MMtpa and 7.6MMtpa, respectively.
Which research area is of most value to you?
- Short-term fundamentals of the global LNG market
- Country-level deep-dive reports
- Sector dynamics: power, heating, transport, industries
To calculate shipping cost components for LNG exports from the United States, Bloomberg clients have access to the LNG Shipping Calculator on the Terminal.
- Calculated shipping costs and seller netbacks to 15 destinations, with customizable assumptions such as destination market prices, vessel specifications, or shipping logistics.
- A comparison calculator for spot and future netbacks for up to three destinations.
- Automatic updating of spot prices and forward curves with Bloomberg Terminal data.
27 LNG projects are targeting final investment decisions by 2019
LNG projects are capital intensive. Total investment of $336 billion is required for all 27 projects to progress.
Our analysis suggests that 11 of the 27 projects will probably reach FIDs based on various criteria, including ability of securing finance for the projects. These 11 projects will require $144 billion of investment, or $43 billion in equity based on a conventional 30:70 equity-debt split.
Financing is a big challenge to reaching FID. LNG export projects can be funded directly by their developers via balance sheet financing, which includes accrued cash and corporate loans. Alternatively, they can use limited recourse project finance structures.
Project finance is based on estimated future cash flows from the project and is most commonly used when a project developer/sponsor is not able to borrow enough money on a corporate basis, or needs to protect itself from contingent liabilities in partnerships.
This is particularly the case for less-established LNG players such as independent developers in the U.S. and elsewhere.
An offer of project finance will typically require developers to secure long-term LNG sales and purchase agreements (SPAs) with investment-grade buyers.
This is becoming a challenge, as much of the future demand is expected to come from South and Southeast Asia, where buyers' international credit ratings are below investment grade. In addition, large traditional buyers' push for short-term contracts place project developers in a difficult position to initiate project financing discussions.
Apart from long-term SPAs, lenders also look into the experience of project developers. The 27 proposed FIDs are only backed by 11 large project sponsors (equity investors) and a number of small players. It is common to see small players struggle to pass the strict screening by lenders on their track records in relevant project experience.
Moreover, lenders themselves place a bet on an LNG price outlook and demand stability. Any negative voices on price outlook and demand uncertainty in the market may affect lenders' appetite for long-term financing.
China to become the world’s biggest LNG importer in 2022
In 1H 2018, China’s total gas consumption grew 15% from a year earlier, reaching 134Bcm. Sustained economic growth, the continuous push of environmental policies, and a strong recovery in power demand growth have boosted gas usage.
China's 'Blue Sky Defense'
Improving air quality continues to be a critical driver of the natural gas market.
As the initial Air Pollution Protection and Control Action Plan (APPCAP) expired last year, the regulator released a Blue Sky Defense Three-Year Action Plan (2018-2020) in July 2018 to keep the sky blue.
Measures and arrangements similar to those rolled out last winter are expected to be implemented again this winter. These include:
- Sending supervision work groups to provinces
- Halting or reducing industrial production temporarily
With the geographic coverage expanding to include the Fen-Wei plain (including 11 cities across three provinces), the new blue sky policy also emphasizes securing gas supply before switching from coal to gas.
Domestic production grew by a meager 4% for the first six months of 2018. Consumption growth once again outpaced domestic output, which led to a 36% surge in total gas imports.
In our base-case scenario, we expect China to import 51MMtpa of LNG for the full year, 13MMtpa higher than 2017.
China has a total of 66.4MMtpa of commissioned LNG import capacity to date. The average terminal utilization rate is expected to climb to 77% in 2018, a further increase from 68% in 2017.
China imported a record 24 million metric tons of LNG in 1H 2018, representing a 50% surge compared to 1H 2017.
Global LNG Outlook, Bloomberg NEF
Some 82.3MMtpa of LNG import capacity has been proposed to come online post-2022, but not all of it can get government approvals.
If all the proposed capacity is built, this will equip China with 158MMtpa of total LNG import capacity by 2030 and will pose a risk of overcapacity.
Where do you think the North Asia spot LNG price will be this winter (November to February)?
BNEF's Global LNG Monthly reports aim to provide a holistic account of the monthly global LNG trade and the changing market dynamics.
September 2018: Calm Before Winter
LNG imports totaled 27MMt in August, down by just 0.1MMt compared to July, as increased imports in Japan and China were countered by drops across the rest of Asia.
Clients can find the report on the Bloomberg Terminal or on the BNEF website.
August 2018: Flattening Demand as Supply Increases
LNG imports soared 4% in July from June. August demand is expected to be flat at 27MMt as coal and nuclear power plants ramp up to meet power requirement. (Terminal | web)
July 2018: Cooling Needs Up, Other Fuels Weigh In
LNG imports in June 2018 rose only marginally at 0.5% from May as supply outages tightened the market. July demand is expected to increase 6.3% from June to reach 27MMt as the weather heats up, despite nuclear and coal capacity coming back online in Japan and South Korea.
(Terminal | web)
June 2018: Steady Demand as Summer Heats Up
June demand is expected to rise moderately at 4.8% from May to reach 26MMt, led by China and marginal importers. Spot netbacks of U.S. LNG and European reloads to Asia have improved noticeably, likely pulling cargoes East.
(Terminal | web)
May 2018: Marginal Importers Are Calling
LNG imports in April 2018 fell 10% from March as North Asia further slides into the shoulder season. May 2018 demand is expected to rise 2% from April to reach 24MMt, largely due to an uptick in Latin America and Middle East.
(Terminal | web)
April 2018: Maintenance Period Slowdown
Imports for March 2018 increased 8.5% compared to February as Europe took in more cargoes and demand fell in North Asia largely due to seasonality. April 2018 demand is expected to drop 12% as winter ends in the Northern hemisphere and we enter the regular maintenance period.
(Terminal | web)
EU Fuel-Switching, LNG Netback and Oil-Indexed Calculator
To calculate fuel-switching prices for the U.K. and Northwest Europe, Bloomberg clients have access to the the European Fuel-Switching Calculator.
- Calculated low and high boundaries of the fuel-switching range in the U.K. and Northwest Europe. The plant efficiency assumptions in the calculation can be changed.
Calculated prices of LNG at various global locations adjusted for the transport cost to Northwest Europe.
Calculated price of gas bought under an oil-linked contracts using gasoil and fuel oil as input products.