Mixed mood for LNG in 2019

As we enter 2019, the mood in the LNG market is mixed. The big LNG buyers are back, and we are set for a record year for supply in terms of both production growth and new project FIDs.

Sharing his thoughts on what will shape the market longer term, Wood Mackenzie Research Director Giles Farrer suggests that despite a rebalancing global LNG market, 2019 will be a record year for LNG project sanction, with in excess of 60mn t/y of capacity likely to take final investment decision (FID), well above the previous 45mn t/y sanctioned in 2005 and a tripling of the 21mn t/y sanctioned in 2018.

Frontrunners in the race to hit FID include the $2bn Arctic LNG-2 in Russia, at least one project in Mozambique and three in the US – Golden Pass, Calcasieu Pass and Sabine Pass Train 6. The small Woodfibre project in Canada may also get the green light in 2019 as well. Other projects in the US, Qatar, Papua New Guinea, Australia and Nigeria are targeting FID in 2019 too, providing some upside to the already bullish view.

Gas prices are expected to fall. Asian LNG demand growth will not keep pace with LNG supply and Europe, north-west Europe in particular, will have to absorb the surplus, especially during the summer. But Europe needs additional imports and flexibility, given its increased reliance on maxed-out Russian and Norwegian imports. While there will be more LNG imports than required, providing competition to pipe imports and putting pressure on prices, this will unlikely bring the level of oversupply that some fear.

Wood Mackenzies’ forecast for 2019 is for title transfer facility (TTF) to average $6.90/mn Btu (from $8/mn Btu in 2018) and Asian LNG spot prices to average $8.50/mn btu (from $10.30/mn Btu in 2018) assuming normal weather patterns. However, a mild end to winter could send more LNG into Europe and drive prices down further.

An economic downturn would add further pressure on prices. Following eight years of global economic growth, economists agree a downturn is simply a matter of when and how deep. A recession would bring gas/LNG demand and oil prices down, delay FIDs and push the global LNG market back a few years. But there could be a worse scenario for the gas market – a major economic downturn happening in 2020 or 2021, just after 60–100mn t/y of LNG has taken FID. That would wipe out a forecast price recovery post-2020 and make the forecast that prices soften a little around 2025 look a lot worse.

Meanwhile, a global economic slowdown, a more considered approach on coal-to-gas switching and increased domestic infrastructure availability will mean LNG demand will slow in 2019, from the 40–45% growth seen in 2017 and 2018. However, China will still grow at around 20%, by far the largest source of LNG demand growth in the global market.

That said, China announced a series of gas policies in 2018, aimed at relieving supply tightness and import dependency. In 2019 there will be more clarity on the level of ambition of Chinese domestic supply growth and the ramp-up of the Power of Siberia pipeline. Wood Mackenzie is bullish about both and the competition they will provide for LNG growth potential post-2020.

Coal-to-gas switching in China and recent coal power retrials in Europe have provided headroom for gas demand growth. In South Korea, a new electricity plan will be introduced in 2019. This may push further the adoption of higher taxes on imported coal and make the restrictions which were imposed on old coal plants last year more onerous. In Japan, the government could scrutinise the 8 GW of coal under construction and the 8 GW at the planning stage more heavily, after most of the country's financial institutions toughened their lending criteria for new coal projects.

In India, the National Clean Air Action Plan is aiming to reduce PM10 and PM2.5 concentrations by 20% to 30% over the next five years. If it is rigorously implemented, it could force the shut-down of old polluting coal plants. And in Germany, the Coal Commission is to soon publish its recommendations on the timing of coal phase-out. A leaked document suggests initial phase-out could start as early as 2022.

Lastly, the transit and supply contract between Gazprom and Naftogaz is due to expire at the end of 2019. By then, there will hopefully be clarity on the commercial terms for Russian gas transiting Ukraine in the early 2020s. A new commercial agreement is the most likely outcome. But relationships between Ukraine and Russia remain fraught and a no-Ukraine transit scenario cannot be ruled out. Should that happen, Europe would be at risk of supply disruption in 2020, rather than oversupply.