WoodMac: LNG projects move ahead amid deferrals upstream

LNG projects worldwide continue to move toward final investment decisions (FID) in 2015 and 2016 in contrast to 45 upstream oil and gas projects which have been deferred already in 2015, Wood Mackenzie said in a recent global gas analysis.

If none of the proposed LNG projects are postponed, the market could see another 100 million tonnes/year (tpy) of capacity approved in the next 6-18 months, extending the likelihood of an LNG supply surplus in Asia to 2025, it warned.

“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 an FID have been postponed,” said Noel Tomnay, WoodMac’s vice-president of global gas and LNG research, who wrote the Sept. 3 report.

Tomnay said global LNG production is about 250 million tpy, and another 140 million tpy of capacity are 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,” Tomnay said. “However, that bearish prognosis is now being exacerbated by a demand downturn.”

Asia and China are particularly significant in the revised outlook, Tomnay said. “China’s LNG import commitments are set to rise by 17% year-to-year between 2015 and 2020, from 20 million to 41 million tpy, but [it] will struggle to take all this LNG so quickly.”

In contrast, its LNG imports fell by almost 4% year-to-year in 2015’s first half, as a consequence of subdued industrial output and fuel competition, which was driven by relatively low-priced crude oil, Tomnay added.

“The outlook for longer term incremental LNG demand growth in China is also being negatively affected,” Tomnay said. “With lower industrial output and power generation competition increasingly characterizing South Korea and other key Asian LNG markets, buyers are not in a hurry to finalize new LNG contracts.”

BG’s is only deferral

So far, BG Group PLC has been the only company to reassess its investment decision on a major LNG project with its postponement in February of its proposed Lake Charles, La., endeavor, Tomnay said. Most other major companies are pushing ahead, including Royal Dutch Shell PLC, Petronas, Eni SPA, Anadarko Petroleum Corp., BP PLC, ExxonMobil Corp., and Woodside Petroleum Ltd.

“Postponement could invalidate contracts for the portion of project LNG sold so far, and jeopardize hard-won stakeholder support, including from local communities,” Tomnay said. “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.”

The report said if company statements are legitimate, there could be FIDs for some 50 million tpy of new US capacity and 60 million tpy from outside the US within the next 6-18 months.

“Development of even half of this proposed supply could prolong the Asian oversupply to 2025,” Tomnay said. “[WoodMac’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.”

Responding to the WoodMac report’s conclusions, Fred H. Hutchinson, executive director of LNG Allies Inc., noted that based on first-hand discussions with about 12 sponsors of the next wave of US LNG export projects, companies continue to be optimistic.

“Yes, global market conditions are challenging at present, but potential LNG importers in dozens of nations remain convinced that US LNG can diversify their fuel supplies and enhance their energy security, especially in the mid- to long-term,” he told OGJ by e-mail.

Contact Nick Snow at nicks@pennwell.com.

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