Changing Paradigm in The Global LNG Market: Opportunities And Risks For Major Suppliers in The Gulf Region
Beginning from early this decade, global LNG market is going through dramatic changes. The market is increasingly becoming oversupplied and competitive by new large volumes from Australia, USA and Russia. At the same time, share of Japan and South Korea, two of the largest LNG importers in the global LNG market is decreasing. At the same time, China, India and European countries are becoming new demand center and at the same time, countries in the South East Asia are emerging as important players in the market. Natural gas is the fastest growing fossil fuel and LNG demand is increasing even faster than trade volume of pipeline gas. Natural gas consumption is growing because infrastructure is more readily available around the world and its merit as environmental-friendly fuel is greatly helping its position in national energy mix in many countries, such as China, India and countries in South East Asia. At the same time, the LNG market has grown into more mature stage as new buyers and sellers keep on entering the market. Due to the improvement of technology of floating liquefaction plants or floating regasification plants, entrance into global LNG market became easier, especially for smaller players. By using FLNG, buyers and sellers do not even have to invest billions in order to construct onshore LNG export and import plants. They can even rent the floating LNG vessels for several years, which is considerably easier and cheaper than building onshore LNG plants. Traditional sellers and buyers are facing new era and exporters are experiencing unprecedent competitions as importers are left with more choices. There is enough supply in the market therefore, length of term LNG contract is becoming shorter and contract volume is decreasing. Supply surge is faster than demand hike. As a result, spot LNG price went down to one of the lowest levels in modern LNG history. It is believed that the most important factor that caused oversupply in the global natural gas market is emergence of the US as one of the largest LNG exporters and closure of US market to sellers, which once regarded as one of the potentially largest natural gas importers in the world. Oversupplied LNG market is the domino effect of successful development of shale in USA. However, the fact USA became major LNG exporter, instead of major importer, is not the only reason for changing market paradigm. Its geographical location has greatly helped the US LNG exporters become global swing supplier. LNG plants in the Gulf of Mexico can access Asia Pacific region and Europe, two of the most important markets, with ease. It was all made possible because of expansion of Panama Canal. In my opinion, there are only two swing suppliers, Qatar and USA, together with Mozambique in the future. However, it turned out to be the US LNG is not always cheaper than LNG from other sources, which was considered otherwise in the beginning of this decade when the US LNG projects began to take FIDs. US LNG is often pegged to Henry Hub, its domestic natural gas hub located in Louisiana At the same time, Asian buyers began less inclined to sign long-term contracts indexed to Henry Hub prices and learned that it also has price-risks like LNG provided by other projects. As competition in the market is reaching unprecedented level, price competitiveness, credit ratings of sellers and ability to supply at desired timing are more valued than ever.Strengthening competitions will not seriously affect the position of Qatar in the market due to following reasons: (1) Qatar LNG has one of the lowest break-even price (2) Swing supplier - Qatar can send LNG to any major buyers in the world (3) Exporter with proven track record (4) Qatar is located ideally from new demand centers, South Asia, South East Asia, Gulf countries and LNG demand in Europe is growing rapidly. However, Qatar will face much stronger competition in the major importing countries in the East Asia due to new suppliers from Australia, US and Russia and LNG market price will be more likely lower than previous years. But it is anticipated Qatar will keep its position thanks to above-mentioned factors.