JEDDAH — Despite the effect following the recent OPEC move, the liquefied natural gas (LNG) market will mostly likely see a lower price environment over the next several years compared to what the market had been used to until mid-2014. The significant expansion of production capacity and demand growth, even if relatively strong, is not sufficient to absorb the new supply entirely. This supply-demand dynamic translates into significant downward pressure on already depressed LNG spot prices. The global supply of LNG expanded at 9% per year from 2001 through 2011. Since then, supply has been essentially flat, hovering around 320 billion cubic meters per annum (bcma). However, supply stands to expand substantially over the next several years. There are 13 liquefaction plants that have secured a final investment decision (FID) and will commence operations within the next five years. Collectively, these plants will add production capacity of 185 bcma, equivalent to 57% of the world's total production in 2014. In addition, there is an additional 270 bcma of potential liquefaction capacity in projects under consideration. However, these projects are relatively unlikely to come to fruition in the near term due to the low LNG spot price outlook and increasing breakeven prices for new liquefaction projects. LNG demand grew at a 9% annual growth rate between 2002 and 2011. While demand has been largely flat since then, demand growth is poised to resume its upward trend. "Our base scenario assumes annual growth of 5% to 6% from 2015 through 2025. The key drivers of this growth will be China, India, and Southeast Asia, which collectively will account for about 75% of total demand growth." There are a number of uncertainties, though, that could lead to markedly higher or lower final demand. These include energy policies, economic growth, and competition from alternative fuels or sources of gas supply, such as domestic production or pipeline imports. For example, restarting of nuclear capacity in Japan, could significantly reduce demand for LNG. BCG modeled low, base, and high scenarios for supply versus demand for 2018 and 2025: In eight out of the nine scenarios for 2018, the scenarios indicate significant oversupply. This will put a lot of downward pressure on LNG spot prices: Significant oversupply ( 90 bcma): LNG spot prices in Europe could find a floor at coal substitution values for power generation in Europe ($4.6 / MMBtu assuming a coal price of $45/ t and CO2 price of $25/ t). Moderate oversupply: ( 90 bcma): LNG spot prices in Europe could find a floor around Henry Hub price in US + tolling and transportation fees ($7 / MMBtu assuming a Henry Hub price of $5/ MMBtu). In the context of increased liquidity in LNG markets, these low spot prices could prompt growing numbers of customers to ask for renegotiation of their existing long-term LNG contracts. This would be more probable in an environment of high oil prices (as long-term contract prices indexed to Brent increase substantially) coupled with a significant oversupply in the LNG market. For Middle East LNG exporters like Qatar, who have seen their profits decline due to the depressed LNG market, now is the time to invest in market development. They should explore developing new markets (e.g. Philippines in SE Asia) and try to diversify their markets to become more resilient in an oversupplied market versus supply competitors. On the other hand, LNG importers like UAE and Kuwait can probably take advantage of this oversupplied market by renegotiating their long-term contracts or striking new contracts at a favorable price. In addition, for countries like Saudi Arabia, this could be a good opportunity to test the market with a low investment and attractive pricing of potential LNG imports. Moreover, the depressed outlook for LNG market is also bringing opportunities to Middle East exporters and importers who play a major role in the global gas market. Implementing LNG strategies takes time, so Middle East sellers and buyers should start now to revise their strategies and take advantage of the changing dynamics in the LNG market. Bjoern Ewers is Partner and Managing Director at The Boston Consulting Group Middle East; and Iván Martén is Senior Partner and Managing Director at BCG Madrid
