QNB: Growing Demand Keeping LNG Prices High

Robust global demand is likely to keep LNG prices high over the next few years. Demand is growing both as a result of strong Asian economic growth and the switch to cleaner energy, particularly in China, the QNB Group said in a report.

This trend is likely to continue, notwithstanding the so-called US shale gas revolution and the coming into operations of the USD400bn Russia-China gas pipeline signed on May 21, 2014. Overall, the future of the LNG market remains bright and is likely to result in high LNG prices for years to come. This will continue to support Qatar’s large current account surpluses.

The LNG market continued to tighten in 2013. Global LNG deliveries were an estimated 240m tons–broadly flat compared with 2012. Qatar continued to be the largest LNG exporter, with about one third of global supply. At the same time, demand from Asia and Latin America rose, with China, South Korea and Mexico registering the largest increase in LNG demand. In particular, China brought three new re-gasification terminals online as its switch from coal to LNG as a cleaner fuel for electricity production continued. This tightening of the market resulted in an average USD1 increase in LNG prices per million British thermal units (mBtu), despite Brent crude oil prices falling USD4.5 per barrel and lower LNG demand from Europe.

The outlook for the LNG market is likely to continue along similar trends in 2014. On the supply side, three new LNG trains in Algeria, Australia and Papua New Guinea are expected to come on-stream in 2014. This is likely to add about 10m tons to global LNG production–a 4.2% increase. On the demand side, continued growth in Asian demand and the need for Europe to diversify away from Russian pipeline gas may outpace the increased supply, leading to a small increase in LNG prices of about USD0.5 per mBtu despite the expected decline in Brent crude oil prices. The ongoing violence in Iraq and Syria could, however, result in higher-than-expected LNG and crude oil prices in the second half of 2014.

Over the medium term, global LNG exports are unlikely to meet the growing global demand, leading to higher LNG prices. On the supply side, the gradual ramp up in production in Australia (60m tons over the next six years) and Papua New Guinea (7m later this decade) is likely to result in global LNG exports reaching 300m tons by 2020–a 3.8% compound annual growth rate. Additional exports are unlikely to materialize before then. In particular, the so-called shale-gas revolution in the United States is not expected to materialize in additional LNG exports before 2020 as this would imply a convergence of US domestic gas prices (Henry Hub) to international LNG prices, something current and future US administrations are likely to resist (see our Economic Commentary dated November 28, 2013). Moreover, the recently-signed agreement for Russia to provide 38bn cubic feet a year of pipeline gas over the next 30 years to China is likely to imply a displacement of gas supplies from Europe to Asia, thus pushing up prices in Europe while reducing prices in Asia. While this is likely to bring about convergence in global LNG prices, it will not change the aggregate global gas supply.

On the demand side, two factors are likely to make global demand continue to outpace global supply. First, energy demand in Asia is expected to remain robust, even after taking into account a slowdown in Chinese growth. Countries like China, India, Indonesia, Malaysia, Pakistan and Thailand have just started to rely on LNG supplies for their energy needs and this trend is likely to grow over the next few years. Second, China’s rising pollution will mandate a switch away from coal to cleaner energy sources, particularly LNG and pipeline gas. These two factors are expected to lead to global LNG demand growing steadily by 5-7% a year up to 2020, thus outpacing global supply.

Overall, robust LNG demand is likely to outpace global supply up to 2020. This is likely to imply higher LNG prices as demand from Asia remains robust. As the largest exporter in the world, Qatar is likely to benefit from higher LNG prices, resulting in large current account surpluses for years to come.

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Press Release, June 23, 2014; Image: QNB Group