Global LNG market is heading toward a surplus, BRG analyst says

Countries attempting to import more LNG could increase an already growing advantage over suppliers worldwide in the next few years, a market analyst suggested.

“Demand growth could be slow for the next few years, but as lower prices sink in, it could start to grow,” said Christopher Goncalvez, a managing director in Berkeley Research Group’s Washington office. “Japan is a huge wild card as it ponders whether to reactivate its idled nuclear power capacity. That creates so many uncertainties.”

A global LNG surplus already exists, Goncalvez told an audience at the US Energy Association on Sept. 22. “We have become much more conservative with regard to LNG exports,” he said. “We see a range of 44-63 [billion cu m]/year by 2020. There are some variables out there that might possibly drive exports up a bit. But demand won’t be able to keep up with supply for the next decade.”

Impacts are strongest in Asia, which he said is “no longer a rapidly growing, but a rapidly slowing, market.” China is slowing down, India is ramping up, and Japan and Korea’s LNG demand prospects are uncertain because of nuclear power plant reactivation uncertainties, Goncalvez said. “A lot of hope was placed on Chinese demand, which did not materialize as hoped,” he added.

He said India’s LNG demand is elastic. “The lower the price goes, the more LNG companies want to buy,” Goncalvez said. “That’s happening now, although there are credit and financing questions.”

Global LNG markets changed from 2006, when about 16% of total trade was from spot markets or under short-term contracts, to 2014, when it reached 29%, he said. “There’s a lot more liquidity, with seven new exporters and 15 new importers,” Goncalvez said. “But the exporters are relatively big and the importers are relatively small. The result is that we’re heading toward a much more liquid and transparent market.”

Demand growth decelerated after 2011, moving European and Asian LNG prices closer to Henry Hub levels, and reducing volatility, he said. Producers have been able to offset lower gas revenue to a degree by making operations more efficient and focusing on more productive wells, he said.

“There could be some interesting financial pressures in the next 3-6 months which could have substantial impacts on shale gas producers,” he said. “Production growth still has been incredibly tenacious. Once producers built scale operations in major plays, they became incredible efficient. The big wild card will be whether Wall Street turns the money off.”

Contact Nick Snow at [email protected].