This article was originally published in LNG Industry. It was written by Richard Howley, Penny Cygan-Jones and Jack Longden.
Profitability in the LNG market continues to be squeezed as prices remain low in a market awash with capacity. Despite predictions in September 2016 that the increase in Brent to US$55/bbl by the beginning of 2017 will likely contribute to a higher contracted LNG price, the current slump in the price of oil, amongst increasing costs in the sector, has dampened such predictions. Costs in the sector have risen as human and resource availability has failed to keep pace with the rate of development. As a result of market conditions, a number of companies have posted 3Q16 losses.
LNG spot prices in Asia have risen from a low of US$4.241 in May to US$6.60/million Btu as winter approaches, a shadow of the US$20/million Btu that were being realised in 2012 - 2013. The price increase was also driven by increased demand from South Korea, which saw four nuclear units put offline following earthquakes in mid-September, depriving it of 22 GW of network capacity. India also proved to be an active market throughout September as LNG became an attractive alternative to competing fuel supplies due to depressed prices and ready market availability.
The momentum of the AUS$200 billion LNG construction boom in Australia, coinciding with increased supply from Qatar and North America, continues to subdue prices across the market. At the same time, the industry has seen higher than forecast project costs and cost overruns. Other projects, such as the US$40 billion Woodside Browse project, a partnership including Royal Dutch Shell, BP and a joint venture (JV) between Mitsubishi and Mitsui, have been halted indefinitely amidst concerns of feasibility. Unsurprisingly, there are no new greenfield sites in Australia that are scheduled to be approved in the next few years.1
With increasing pressure on large scale LNG plants to prove returns to investors, the market is increasingly backing smaller scale LNG initiatives. The technology to allow LNG providers to offer a variety of ‘plug and play’ products is now proven thanks to early adoption, and offers commercial opportunities with decreased commissioning times in bunkering, distribution by lorry and rail, and small scale distribution and redeployment. These technologies allow for scalable supplies that are better suited to respond to short term fluctuations in demand, including demand originating from areas of the market that were previously unsuited to LNG as a fuel source. The interior of Alaska and the islands of Indonesia are two examples discussed in greater detail within this article.
In addition, tighter regulation on emissions within the EU, both atmospheric and marine (where bunker fuel will be required to have a sulfur content of 0.5% or lower from 1 January 2020), continues to encourage growth in small scale LNG projects across the continent, from reloading services (Grain LNG, UK) to bunkering initiatives (Port of Rotterdam Harbour Basin and Zeebrugge) to multi-modal LNG reload terminals and truck loading (Enagas, Spain). Opportunities for small scale LNG in transport are also increasingly being realised, with the first LNG-fuelled bus in India being launched at Petronet’s Kochi LNG import terminal. This project, involving Petronet LNG, India Oil Corp. and Tata Motors Ltd, demonstrates the market interest in LNG alternatives.
Engie, Mitsubishi Corp. and NYK Line have also recently launched Gas4Sea, a bunkering initiative that combines leading industry experience in LNG supply with shipping expertise to offer a ship-to-ship (STS) refuelling platform. The purpose built bunkering vessel is the first of its kind, offering 5000 m3 of LNG capacity, which is scheduled to become operational in 4Q16.
Where large scale LNG investment is occurring, the market has seen an increasing preference for floating terminals over land-based options. Floating terminals offer lower associated long-term risk, with scalable capacities through the addition of extra floating storage units (FSUs). This also realises efficiencies in existing LNG infrastructure by recovering additional value from older LNG carriers, which can be readily adapted for storage purposes. Advancements in LNG connector technology has also facilitated a number of flexible mooring options that can withstand rougher sea conditions with easier, intelligent, connection points. This dramatically increases the ease of access to LNG by removing the need for established docking facilities, reducing costs and improving safety across the industry.
Recent developments in the LNG market reflect the Einsteinian theory that “In the middle of difficulty lies opportunity.” A number of key industry and broader geopolitical headlines that emphasise this current dynamic are outlined below.