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2018

Industry looks to LNG to fuel future success

September 21, 2018 | Singapore | OSEA2018 Industry Insights

Industry looks to LNG to fuel future success

Market buoyed by role of natural gas as ‘greener’ alternative as companies target new strategies

The liquefied natural gas industry is on an upswing as global demand hits new highs with substantial volumes coming onto the market, and as nations around the world turn to natural gas as a cleaner-burning alternative to coal and other fossil fuels for power generation and transportation.

However, concerns are rising of a looming supply crunch as investment decisions on new and expanded LNG projects, which dried up during the oil-price crisis, are further delayed by new business models that favour short-term and spot cargo purchases over the long-term supply contracts that have underpinned major capital investments in LNG production and infrastructure.

Helping to propel LNG demand is a healthy global natural gas market that saw a 3% boom in consumption last year and a 4% rise in production, in both cases marking the fastest annual increase since the immediate aftermath of the 2008 financial crisis.

According to Shell, global trade in LNG itself reached 293 million tonnes in 2017, with imports growing by 29 million tonnes, 30% more than expected.

While natural gas demand will grow by an average of 2% per year over the next 20 years, Shell says in its most recent LNG Outlook, demand for LNG is set to increase by 4% annually.

It is a remarkable development for a sector that only a few years ago appeared set for relegation to a relatively minor role in the energy market, as plans for more than 50 import terminals in the US were made redundant by the shale gas explosion.

Now the US, buoyed by that very abundance of shale resources, is emerging as a major new exporter, and the LNG business has quickly adapted to the loss of potential US demand through the use of floating regasification technology to target a broad variety of markets across the globe, such that today even major LNG producers such as Malaysia and Indonesia also have import projects.

Record-setting

Last year’s record-setting global LNG trade tally was driven largely by new supply from Australia, with additional capacity at Australia Pacific LNG and Gorgon contributing to the country’s added 11.9 million tonnes of production, and the US, where two new trains at Sabine Pass brought production gains of 10.2 million tonnes, according to the International Gas Union (IGU).

China alone added 12.7 million tonnes of LNG imports in 2017, a huge increase attributable to strong enforcement of coal-to-gas switching policies aimed at improving air quality, the IGU says.

“China’s increased need for LNG accounted for almost half of the global expansion, with China overtaking (South) Korea to be the world’s second largest importer of LNG after Japan,” Spencer Dale, group chief economist at BP, said in London early this summer upon the release of the UK supermajor’s annual Statistical Review of World Energy.

However, some clouds could obscure the sunny outlook.

In August, China signalled it might double tariffs on LNG imports from the US if trade disputes with US President Donald Trump’s administration escalate.

China later eased its stance, but the mere threat of action alarmed US LNG exporters, which would effectively be priced out of the lucrative Chinese market if the tariffs go into effect.

Should that happen there will be other suppliers ready to step into the breach.

According to the IGU, global liquefaction capacity reached 396 million tonnes per annum earlier this year with 32.2 million added between January 2017 and March this year — a period

that saw start-up of the first floating LNG production vessel, PFLNG Satu, operated by Malaysia’s Petronas.

Growth is expected to continue at a rapid clip, the IGU says, with 92 million tpa of liquefaction capacity under construction “and a further 875.5 million tpa of proposed capacity in the pipeline”.

Final investment decisions on many of those projects are urgently needed to stave off potential supply shortages in the next decade, Shell says.

Uncertainty

However, final investment decisions could be held back due to market uncertainty created by “increasing levels of deregulation and competition in the downstream gas and power markets”, which can make it more difficult for buyers to secure LNG volumes “on traditional long-term, fixed volume basis”, the company warns in its 2018 LNG outlook.

“Following the wave of investment from 2011 to 2015, fi­nal investment decisions on LNG projects have nearly stopped,” Shell says. “As LNG projects generally take more than four years to start production, new supply will not be ready until well into the next decade.”

Shell, like others, has made natural gas a more prominent part of its energy portfolio in recent years.

LNG offers flexibility, Shell says, in regions where cross-border pipelines are limited, and where floating storage and regasification units can be hooked into a grid quickly, eliminating the need for onshore processing facilities.

Shell also sees LNG as an important step in the energy transition, noting in the 2018 report that it produces about half the greenhouse gas emissions that coal does in electricity generation.

Speaking at an event in London this July, Shell chief executive Ben van Beurden described the company’s research and development efforts in new energy technologies such as battery-electric vehicles and hydrogen fuel for transportation.

“Yet, even as solutions such as battery-electric and hydrogen build towards significant scale, the world needs other solutions that are available right now,” he said, adding: “One of these is LNG.”

This article was originally published on upstreamonline.com