LNG in an era of lower oil prices

Publication November 2015


The decline in the price of oil since mid-2014 is having a significant effect on the global liquefied natural gas (LNG) market. LNG prices are heavily influenced by changes in crude oil pricing, and by other factors which determine LNG spot prices at any particular time and destination. Unfortunately for LNG producers, the decline in oil prices is coupled with circumstances over the last year that have led to both reduced demand for, and increased supply of, LNG.

Liquefaction plant developments in a lower oil price environment

Certain consequences of sustained lower oil prices on the future of the LNG industry are already evident. Before the fall in oil prices, significant growth was projected: approximately 150 billion cubic meters (bcm) of LNG liquefaction capacity was under construction as of May 20141, up from 130 bcm in 2013, and as at March 2015, it was estimated that 200 bcm of capacity could be contracted before the end of the decade2.

As an example, since the slump in the oil price, a number of oil majors have pointed to negative implications for Canadian LNG developments. However, suggesting a positive longer term view, the British Columbian government has committed to a goal of three LNG facilities being in operation by 2020. In support of this, on February 19, 2015, then Prime Minister Stephen Harper announced federal tax breaks to spur economic activity that will be in effect for nearly 10 years for British Columbia’s nascent LNG industry.

Although an initial delay has been indicated for Mozambique LNG, the scale and size of the reserves has the potential to drive the project forward, especially as Mozambique is strategically located to access the Indian market and other LNG import emerging markets. The recent 30 trillion cubic feet (tcf) gas discovery by ENI in the Zohr field, offshore Egypt, is significant for the industry and although current agreements indicate that the gas will be for Egyptian domestic use only, this is another project in support of a positive outlook for LNG development.

Other potential LNG export projects, at earlier stages in the development process, appear to be continuing and by the time they come to take a final investment decision (FID), the oil price and forward price curves may have recovered sufficiently to enable such projects to move into construction without delay.

Short term LNG trading expected to increase

Despite LNG trading having hit a four year low in Asia in January 20153, the decline in oil prices and other adverse market conditions are expected to lead to an increase in LNG trading over the coming years. A milder Asian winter led to reduced regional demand and in a similar period, the LNG export facility in Papua New Guinea added 6.9 million metric tonne per year of capacity to the market. Prices in Japan have been predicted to drop significantly through 2016, not only due to lower oil prices but also due to weak economic growth and the planned restart of Japan’s nuclear plants.

This is good news for LNG buyers. The cost of importing LNG to Egypt for the state owned import company, it has been reported, will decrease by US$500 million annually. Four separate international bidders are reported to have been awarded contracts to supply four cargoes a month over approximately two years. The cargoes will be regasified via two leased FSRUs with the Hoegh Gallant passing its acceptance tests in April 2015 and BW Singapore, a second FSRU leased from BW group, intended to be operational in October 2015.

Changes in LNG carrier chartering dynamics

The effect of lower oil prices on the demand for LNG carriers should also be considered. There were 158 vessels on order as at September 18, 20154. Although LNG carriers were traditionally built as part of a long-term contract between an LNG producer and importer, the current trend is for LNG carriers to be employed under shorter term time charters of five to eight years. This shift in the chartering structure, along with the availability of LNG carriers on the spot market, has enabled the market to manage drastic fluctuations in LNG carrier charter hire rates.

With the expansion of spot trading following the increase in supply from Australian exporters over the past 12 months, Dynagas Ltd, GasLog Ltd and Golar LNG Ltd recently announced5 the formation of an LNG carrier pool, aptly named “The Cool Pool”, to jointly market their LNG carriers for spot charters and spot cargoes. Shipping pools are widely used in the oil and chemical shipping markets to consolidate tonnage under a single marketing umbrella in order to optimise vessel scheduling and reduce ballast legs. Although The Cool Pool will only initially comprise 14 LNG carriers, it signals an interesting change in the future chartering dynamics of LNG carriers where shipowners may follow the trend of other tanker trades by consolidating their ships into shipping pools.

Whilst in the current market there is a glut of LNG carriers available in the spot market in the short term (with short-term LNG charter rates as low as $31,500 per day for 155,000-165,000 cu m vessels), as LNG projects advance to start up, the decrease in the price of LNG could increase LNG demand, with flow-on effects benefiting the LNG shipping industry by increasing the demand for LNG carriers.


LNG is a long-term business, based on an efficient supply and demand system. The LNG industry has demonstrated its ability to respond to major structural changes in the market, including the unprecedented development of shale in the US and the consequences of the Fukushima earthquake in 2011. Despite these major events, the LNG industry remains relatively stable, with Japan and South Korea, as the world’s largest LNG consumers, together with other LNG buyers, seeking a long-term, reliable energy source. LNG sellers are also here to stay - to monetise their upstream gas reserves and develop and supply gas markets.

The LNG industry needs to keep adapting to changes in the oil price, by consolidating and rationalising - prioritising the more robust projects and leaving other less profitable developments on the drawing board. One question is, how quickly and drastically do raw material, labour and other engineering procurement and construction (EPC) costs need to come down to enable new liquefaction projects with marginal economics to proceed? Other factors may also hamper new LNG developments, such as the sanctions that have impacted on development plans in Russia.

Notwithstanding the current volatility in the oil price, there is confidence in the LNG market. Gas and LNG remain an environmentally friendly fuel, placing them ahead of other energy supplies in the current market.



International Energy Agency, 2014


The mountain of new LNG capacity, Timera Energy - March 16, 2015


Lloyd’s List – September 18, 2015


Bloomberg - August 18, 2015

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