Liquefied Natural Gas (LNG) has played a key role in driving global gas markets over the past number of years. For those who are unsure as to what exactly LNG is, it is natural gas that has been converted into liquid form that can then be safely stored as well as transported on large LNG ships. The liquefaction technology used to cool natural gas into liquid form has dramatically changed the global gas landscape and removed the reliance on transporting gas through physical pipelines. This technology means that LNG can be transported between countries and even continents and is one of the main reasons why it is so important to global gas markets, and specifically the NBP.
For close to 10 years now, LNG has played a key role in balancing the UK gas market during periods of high demand. Also, during that time, global LNG capacity has grown significantly, most notably due to the shale-boom in the US, but other countries have also emerged as key LNG players. However, supply uncertainties linked to declining domestic production, an unprecedented decline in UK storage capabilities, as well as lower Dutch North Sea production, have all pulled the markets focus towards LNG even more.
So why is LNG as a supply source so important now?
Demand is growing, albeit slowly. Economies are recovering, and although this has not yet resulted in a surge in underlying demand, it still creates an element of risk when other long-standing sources of supply are decreasing. Longer-term, global energy demand is expected to increase by approximately 30% between now and 2040, with gas expected to make up 40% of this. And one third of total gas demand over the next couple of decades is expected to be met by LNG. Demand growth is great in terms of being a positive economic indicator, however the same trends are not necessarily being reflected on the supply side in Europe.
According to Reuters, Dutch North Sea gas production is currently 60% lower than it’s 2014 peak. And these figures are unlikely to improve in the coming years. The Dutch government has lowered output several times now as decades of extraction have led to dozens of earthquakes each year, damaging thousands of homes and buildings, with a “total shutdown” possible if necessary. Groningen, the main Dutch gas field, is producing less than half as much gas as it did 3 years ago, but also its flexibility has been drastically reduced, with a requirement to produce as evenly as possible throughout the year. To put the impact of this in context; The Netherlands is the second largest regional producer and exporter of gas after Norway. This decline in their indigenous gas production is likely to see the country becoming a gas importer by 2030.
In the UK, the Rough long-range storage facility, the UK’s largest gas storage plant, was shut-down in 2017. The facility was permanently closed after it had become unsafe and uneconomic to reopen after a series of incidents had led to its temporary closure. Rough had the capacity to hold 9-days worth of UK supply. The storage outlook doesn’t get much better further afield. Across Europe, storage levels are currently at 10-year lows, and understandably, many markets are uneasy about where the next cubic meter of gas will emerge. In terms of UK indigenous gas supply, North Sea UKCS production has been in decline since 2016, with oil and gas production both assumed to decline at 5% a year beyond 2022 according to the Oil and Gas Authority UK.
Although these key sources of supply may limit Europe’s ability to meet peak demand, pipeline supply from Russia has been particularly strong of late. On the surface, this has been bearish for European markets, but it could also foretell a more bullish future where Europe proves to be too reliant on Russia and their geopolitically charged supplies.
All of this has created a major fall in regional production for North West Europe. This means that member states of the European Community will become increasingly dependent on imports: according to the IEA, by 2030, imports of natural gas into the EU will have risen to 63% of the consumption. LNG will be a vital source of these imports.
Global LNG capacity and production has increased significantly in the past decade and right now it looks as if we are in the midst of an LNG supply glut. The US alone quadrupled its LNG exports in 2017, up from 0.5 Bcf/d in 2016 to 1.94 Bcf/d last year. After Mexico and countries in Asia, countries in Europe collectively accounted for the third-largest share of US LNG exports. Five additional LNG projects are under construction in the US, and they are expected to increase total US liquefaction capacity to 9.6 Bcf/d by the end of 2019. Qatar continues to be the world’s largest LNG exporter, a position it has now held for over a decade, with Australia closing in fast on this title. The rise in Australian exports will be underpinned by higher output at an existing project, as well as the completion of three other LNG projects in the near-term.
In terms of LNG import capacity, there are now 35 LNG importing countries, up from just 10 at the start of the century. Globally there was an 11% increase in LNG imports in 2017, with LNG capacity also increasing significantly in recent years (340 MTPA global capacity at January 2017). Growing demand from China is currently being countered by the growing supply of LNG, while demand for LNG in transport is also growing globally. Global demand for gas is expected to increase 2% a year between now and 2030. LNG demand is set to rise at twice that rate at 4% – 5%.
As mentioned earlier, growth in underlying economic demand for gas is limited, but this will change in the coming years. France and Canada announced plans to phase out coal fired generation by 2023 and 2030 respectively, joining Austria, Belgium, Denmark and Portugal in pledging to close coal fired generation by the end of the next decade. Furthermore, the worlds gross domestic product is expected to increase by 3.9% this year, versus 3.8% in 2017, the IMF suggests. European growth is weaker than in the rest of the world; real GDP in 2018 is expected to increase by 2.5% in the EU compared to 2.9% in the US and 4.9% in emerging markets and developing economies.
On the surface it would appear there is enough LNG supply in operation to meet global LNG demand. That is to say, right now there is. But what will happen over the next five or ten years? In Shell’s recently published 2018 LNG Outlook they refer to an emerging LNG supply-demand gap. Shell suggests that post-2020, the sum of LNG supply in operation and LNG supply currently under construction will not meet the forecasted demand. In recent years, increased economic uncertainty has contributed to a decrease in final investment decisions (FIDs) in relation to LNG production facilities. Global upstream investment has suffered dramatic cuts due to the low oil-prices recently traded. In 2014 investment in liquefaction reached 30 MTPA. However, during 2016 and 2017, this figure had shrunk to just 3 MTPA. What is needed in order to ensure that long-term demand growth is met is more LNG supply investment, and more LNG supply investment now.