It’s boom times for LNG markets. The forward strip is showing JKM winter 2021/2022 spot prices exceeding $40/MMBtu, a more than 700% increase from the 2019/2020 winter. Indeed, global gas markets are currently experiencing a near-perfect storm: demand is rising; the sector has faced underinvestment for years; wind production disappointed this summer; and inventory levels in Europe are well below prior-year levels. With world gas markets facing undersupply, LNG supply-demand imbalances have also accumulated. Overseas liquefaction capacity is down despite rising demand and depleted inventories. Although we expect international liquefaction capacity utilization to slowly recover over the next year as some facilities exit maintenance, dampening prices, existing U.S. LNG exporters will supply full volumes at high prices for at least the next 12 months – barring a shocking exogenous event.
Boom times has led to some chatter that one or more U.S. LNG projects will take FID within the year. The probability of another U.S. LNG FID is certainly rising, as some international (and low utilization) terminals may shutter permanently due to COVID and persistent underinvestment in the sector. Indeed, there may be “room” in the market for 1-3 more North American projects, potentially including Tellurian’s Driftwood LNG. Still, additional FIDs are not a slam dunk. Developers must overcome skepticism from investors, creditors, offtakers, and policymakers that LNG will remain a viable and competitive fuel source over the next decade, and beyond.
World LNG Demand
Despite the havoc wrought by COVID-19, world LNG demand actually increased slightly in 2020 to 356.1 metric tons (MT), up from 354.7 MT in 2019. With safe and effective vaccines leading to more mobility than in 2020, there is stronger economic support for higher volumes this year. Moreover, extremely hot July temperatures and drought conditions supported summer fuel burn across much of the world, including in the U.S, South America, Northeast Asia and much of Europe. While warmer winter temperatures could reduce seasonal peak demand, we are confident that world LNG demand will reach another annual record.
International Supply: down in 2021
The market is struggling to meet record-high demand, however, as substantial international liquefaction capacity is not producing. According to several sources, international LNG liquefaction utilization remains near levels seen in 2020 despite extremely favorable pricing conditions for exporters. World LNG July shipments were constrained due to lower exports from Qatar as well as more marginal LNG players in Nigeria, Norway, Peru, and Trinidad and Tobago. Indeed, nearly all incremental y-o-y LNG output appears to originate from just two suppliers: Australia and the United States.
Future International Supply: More Uncertain
While some relatively minor LNG export exporters (such as Norway’s 4.2 MTPA Snohvit Hammerfest terminal) are undergoing maintenance and will very likely return to the market, other existing facilities are in severe danger of permanent closure (For our holistic, long-term supply-demand forecast, drop us a line at info@enkonenergy.com). Moreover, some planned projects, such as Mozambique LNG or Rovuma LNG, are facing indefinite delays due to security concerns in Africa. There is an increasing possibility that the current supply shortfall could extend for longer – potentially much longer – than we previously anticipated.
Future Qatari LNG production is a vital but unpredictable element. Qatar is the world’s lowest-cost LNG producer and could further expand capacity to absorb demand shortfalls; it has also already committed to grow its LNG output to 110 MTPA by 2026. On the other hand, however, Qatar may seek to diversify its economy beyond hydrocarbons and could shy from even more capital-intensive investment in liquefaction capacity.
Greenfield LNG terminals remain high-risk, high-reward investments Weaker international liquefaction supply and the increasing likelihood of an enduring supply gap could open space for additional greenfield LNG export terminals. At the same time, increasingly competitive renewables and ESG concerns inject uncertainty into LNG demand forecasts, particularly in the 2030s. Since LNG projects often have “payback periods” of 20+ years or longer (as well as construction times of 3-5+ years), market actors in the sector face high risks and high rewards. We won’t be surprised if one or more U.S. LNG projects take FID within the next 12 months, but we won’t be shocked if none do, either.