Cold wave toughens the LNG market
The market for liquefied natural gas – like all energy options – suffered greatly last year from the COVID pandemic and reduced demand, but is now looking forward to the future with optimism. Analysts predict a rise in demand, a more flexible market and new forms of trade.

    According to data from Rystad Energy, world-wide capacity for LNG production climbed to 464 million tonnes a year – a rise attributable mainly to the launch of new plants in the United States, where LNG production soared 42 % to 71 million tonnes per year.

    Despite the restrictions linked to COVD, world-wide imports of LNG rose 3 % to 363 million tonnes in 2020. Demand in Asia, boosted largely by China increased by 4 %. Analysts say many Asian buyers took advantage of low gas prices to switch over from coal.

    Promising, predictable, possible

    Nominal LNG capacity of Russian plants has already hit 29 million tonnes per yearActual LNG production, according to figures from Rossstata, increased 3.5 % to 30.5 million tonnes – made possible by increased productivity of production lines of plants in operation.

    Two major LNG plants now operate in Russia – Sakhalin-2 with a nominal capacity of 10 million tonnes but actually producing 11.6 million tonnes and Yamal LNG with a nominal capacity of 16.5 million tonnes.

    The shareholders of Yamal LNG – which liquefies gas from the South Tambeyskoye gas field on the Yamal peninsula — are Novatek (50.1 %), France’s Total (20 %), China’s CNPC (20 %) and the Silk Road Fund (9.9 %). Three production lines operate at the plant, producing 17.5 million tonnes of LNG a year.

     In the first quarter of this year, the company intends to begin shipments from a fourth production line with a nominal capacity of 0.9-0.95 million tonnes, but that figure could be boosted to 1.5-1.6 million tonnes a year. The launch of the fourth production line has been postponed several times – initially until the end of 2019, later until mid-2020 and again until the first quarter of 2021.

    The shareholders of Sakhalin-2 are Gazprom (50 %), Royal Dutch Shell (27.5 %) and Japanese companies Mitsui (12.5 %) and Mitsubishi (10 %), with the project focusing on liquefying gas from the shelf deposits of Sakhalin Piltun-Astokhskoye and Lunskoye.

    Last month, the Russian Deputy Prime Minister responsible for energy, Alexander Novak, said Russia could build more than 10 new LNG production plants by 2035 – to triple the country’s capacity. And that assumes the creation of a long-term programme to develop LNG production.

    “Proceeding with potential LNG projects will enable Russia to increase nearly threefold its production volume of LNG and to produce and monetise 2.5 trillion cu.m. by 2040,” Novak was quoted as saying by the government’s press office.

    According to Energy Ministry figures, Russia’s total LNG production capacity by 2035 will total 267.5-283.5 million tonnes – including plants in operation, under construction, planned or under potential consideration.

      Novatek has already begun construction of a second LNG project – Arctic LNG-2 with a capacity of 19.8 million tonnes per year and costing $21 billion. Other participants include China’s CNOOC and CNPC, France’s Total and a consortium of Japanese companies Mitsui and Jogmec. The first production line is due to go into operation in 2023, the second and third lines in 2024 and 2026.

    Gazprom and Rusgazdobychei have planned joint construction of a plant in Ust-Luga, near St Petersburg, with a capacity of 13 million tonnes per year and costing $13 billion.

    Maria Pirozhkova, specialist at the Energy Ministry’s Centre for Energy Research, said the plant would begin operations in 2024-25.

     Pirozhkova also said that in 2026-27 an LNG plant run by Yatek (Yakutia Fuel Company) could go on stream in Khabarovsk region in Russia’s far east. Active preparations, she said, are under way to take a final investment decision at the plant, which would have as its resource base gas deposits in Yakutia. The proposed nominal capacity – 13 million tonnes and cost of construction – $10 billion.

    Projects run by Rosneft, Taimyr LNG and Kara LNG may also begin operations in the far north of Krasnoyarsk region and near the island of Novaya Zemlya.

    For the moment, the company estimates capacity at the Taimyr LNG plant at 35-50 million tonnes (Russia’s current production stands at about 30 million tonnes) and capacity at the Kara plant up to 30 million tonnes.

    Pirozhkova also said plans were being considered to boost production at the Far East LNG plant (proposed capacity of 6.2 million with production to begin in 2027) to 10 million the basis of the Rosneft fields in the area but made clear that this was, for the moment, only a potential project.

    The return point for the Arctic projects is estimated at $3.70-7.00 per million BTU, depending on the destination of the exports.

Halted for the pandemic

   But does the world need all this LNG?

   To be honest, the situation on the LNG market before COVID was quite difficult owing to the considerable surplus in supply. The industry had developed too quickly – over the preceding five years it had grown by about 10 % a year and companies had brought on stream about 30 million tonnes of new annual capacity.

    Warm winters and a sort of slow-down in demand in Asia also contributed to the market difficulties. In 2019 alone, new LNG plans with a combined capacity of 21 million tonnes were introduced and in 2020 a further 16 million tonnes had been expected.

    The pandemic and the fall in energy prices contributed to the decline in demand and increased uncertainty among investors concerning new projects. Media report said buyers cancelled more than 100 shipments of LNG from the United States against a background of sluggish demand and falling fuel prices. In March, PetroChina declared force majeure in relation to the import of several shipments of LNG as did Indian companies. A similar declaration was made by the Indian GAIL company – pertaining to gas purchases from Gazprom.

    Given the uncertainty, not a single final investment decision was taken throughout the world in terms of new projects.

    It was not until November that the U.S. company Sempra Energy committed itself to an investment linked to the construction of the first phase of a project to liquefy gas from the Costa Azul just inside Mexico, over the border of Baja California- the sole investment project to be confirmed throughout the world. The cost of the project is to stand at about $2 billion and the plant is to start work in 2024.

    Its capacity was originally set at 2.5 million tonnes per year – to be increased later to 3.25 million tonnes. The plant on the Pacific coast will enable gas from Texas and the western United States to be delivered to Mexico and countries in the Asia-Pacific region. And the companies have already clinched a deal with Mitsui and a division of Total to deliver 2.5 million tonnes of gas per year over the next 20 years.

    Cold weather invigorates things

    From the middle of last year, LNG prices rose sharply in response to trade on oil markets. Also having an effect were high capacity on sea transport routes and the of shortages owing to lower production and expectations of a cold winter.

    And the winter of 2021 turned out to be very rugged.

    Freezing temperatures led to feverish trading and a sharp rise In consumption in Japan, China and South Korea. LNG quickly become subject to shortages and prices began to rise from mid-December 2020 and soared to record levels in early January.

    Bloomberg reported that futures on Asian LNG leapt 40 % to hit $800 for 1,000 cu.m. and on the spot market to $1,000 and higher. Asian spot prices were at their highest level since 2014 and six times higher than the lows hit in April.

    In Europe, the winter also turned out to be frigid.  By the beginning of February, European underground storage areas were 40 % empty. Wholesale LNG prices soared to new maximums. Prices declined somewhat in February, but remained quite high.

    Analysts said the world LNG market would recover more quickly after COVID than other sectors and prices have continued to rise this year. In general, demand for fuel used for heating and producing electricity increase faster than other types of fossil fuels as a result of countries looking for alternatives to coal. Demand is rising most quickly in countries like India and China.

    Analysts Finama forecast Asia LNG prices to recover to $300-400 per 1.000 cu.m. And forecast increases in the price of coal and carbon leave room for increased demand for gas in Europe in the summer, according to analysts Wood Mackenzie.

    And s&P Global Platts expects increased demand for LNG in Asia this year with the possibility of much higher prices to come in the event of difficulties in navigating through the Panama Canal.

  S&P Global Platts anticipates an increase in world demand for LNG this year of 3 % compared to 2% in 2020, with a rise in demand in China offset by a decline in Europe.

    World-wide LNG capacity will grow by 14.5 million tones in 2021.

    “2021 is likely to feature a higher overall gas price complex than 2020, but there is also expected to be significant downward pressure on JKM (Japan Korea marker) compared to current levels as we exit the winter,” said Jeff Moore, head of Asian LNG at Platts Analytics.

     Moore expected an “uptick in contract signings in 2021”.

    Rystad Energy forecasts nearly a doubling of LNG world capacity to 886 million tonnes per year (90 % more than the 2020 level). That figure will stand at 220 million tonnes per year in 2040 in the United States, at 124 million tonnes per year in Qatar, 96 million tonnes in Australia and 70 million tonnes in Russia.

    Actual LNG production over that period will rise only by 80 % compared to 2020 levels to reach 672 million tonnes.

    And that will not fully meet rising demand.

    Demand for LNG is expected to climb to 736 million tonnes in 2040. Most of that will be absorbed by Asia, while European imports will fall, thanks to gas carried by pipeline.


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February 2021