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LNG market seen in worse state than oil

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“The oil market is not so bad,” Dr Fesharaki said. “LNG is far worse.”

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Angela Macdonald-SmithEnergy Reporter: 7 Dec 2015

The crude oil market is seen as being in dire straits, but liquefied natural gas is much worse, according to experts.

Hanging as a dark cloud over the market for the next several years are large volumes of LNG from committed US export projects that have firm sales contracts but have yet to be sold to end-users.

Consultancy FGE says between 25 million and 35 million tonnes of the 65 million tonnes a year of US LNG export capacity under construction has been sold to “middle men”, traders or portfolio LNG players such as BG Group or Mitsubishi, that still need to sell the gas on.

“Portfolio sellers and traders are not end-users: they must find buyers,” FGE founder Fereidun Fesharaki says.

In addition, about one-third of Qatar’s export LNG volumes are unsold, while the three big Chinese national oil companies and one Indian NOC have switched from buying to selling as they seek to re-sell LNG they have committed to purchasing, according to FGE.

An example of the latter is Sinopec, the dominant buyer for Origin Energy’s Australia Pacific LNG venture, which is on the cusp of starting production. It is reported to be offering to re-sell cargoes it has signed up to buy from the Queensland plant.

That means about 70 million tonnes a year of LNG is still looking for a buyer, which will weigh on the oversupplied Asian market potentially through to the mid-2020s, the consultancy says. Dr Fesharaki describes those holding the contracts as “desperate sellers” that will provide stiff competition for producers seeking customers for new projects.

LNG oversupply 

FGE’s outlook points to bleak prospects for Woodside Petroleum’s ambitions to give the green light in late 2016 for the construction of the Browse floating LNG venture, given it is still seeking customers for the gas.

Dr Fesharaki names potentially only three new projects that could move forward in the next few years: Anadarko’s Mozambique venture; expansion in Papua New Guinea; and Petronas’s western Canadian venture.

Australia’s wave of new LNG projects, including three in Queensland, Chevron’s two monster Western Australian projects, Inpex’s Ichthys and Shell’s Prelude floating project, are all starting production within the next couple of years.

They make up a large chunk of the 90 million tonnes a year of new LNG capacity that Bernstein Research estimates will start up by late 2017, amounting to 35 per cent of current worldwide demand.

Bernstein sees oversupply of 20 million-30 million tonnes, or 10 per cent of demand, persisting through to 2018 as global LNG demand is struggling to grow.

Chinese demand growth has “collapsed” this year, with LNG imports likely to decline in 2015, for the first time since they began in 2006, Bernstein says. Yet they see the chances of China defaulting on its LNG purchasing contracts, as suggested by some commentators, as “highly unlikely”.

The experts agree that the situation will create huge downward pressures on spot LNG prices, with FGE forecasting that prices will sink to just $US5 per million British thermal units in Asia, and could even plunge temporarily to $US3 or $US4. That compares with December prices of about $US7.28, which are already 42 per cent down from a year ago, according to pricing service Platts.

FGE is anticipating a decoupling of spot and contract LNG prices which FGE expects should remain in the $US8-$US9 range through to 2017, based on its forecast for crude oil, to which Asian contract LNG prices are linked.

“The oil market is not so bad,” Dr Fesharaki said. “LNG is far worse.”

Yet existing Australian LNG producers should be mostly insulated from the worst of the effects, says Adelaide-based consultancy EnergyQuest.

It points out that the new Australian projects coming into production are all largely covered by contracted sales to buyers that respect the sanctity of contracts and value the long-term relationships that underpin the Asian LNG industry.

“In our view, the major factors affecting Australian LNG production are likely to be technical ones like completion timing, ramp-up and gas supply, rather than the state of the market,” EnergyQuest said. 

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