A new report released today by Ernst & Young looks at the evolving market dynamics for global LNG. The "Global LNG report – Will new demand and new supply mean new pricing" indicates the near-consensus view of strong LNG demand growth over the next 10-20 years, but with a growing role for more price-sensitive buyers who are likely to be less willing to pay supply security premiums.
On the supply side, a massive amount of new LNG capacity has been proposed, which if all were built, would more than double current capacity by 2025. Even with reasonably strong demand growth, this implies growing supply-side competition and upward pressures on development costs and downward pressures on natural gas prices. Nevertheless, the very positive longer-term outlook for natural gas is driving investment decisions, both in terms of buyers' willingness to sign long-term contracts and sellers' willingness to commit capital to develop the needed projects.
Dale Nijoka, Ernst & Young's Global Oil & Gas Leader, concludes: "LNG prices are unlikely to collapse, simply because the cost to supply is high and incentives to develop new capacity must be maintained."
Over the industry's last five decades, there has been a progressive broadening of the LNG supply base, with three waves of suppliers. The first wave was dominated by Algeria, Malaysia and Indonesia, while the second wave has been dominated by Qatar and Australia. The third wave could come from as many as 25 other countries, many of which currently have little or no capacity; but by 2020, these countries could provide as much as 30% of the world's LNG capacity.
The advent of diverse new supply sources is challenging the LNG status quo, with Asian buyers presumably looking to modify or possibly replace their long-standing and relatively expensive pricing model of gas prices tied explicitly to oil prices. High LNG development costs will require iron-clad long-term off-take agreements. However, more recently, the market is witnessing the inherent conflict of increasingly-more-expensive projects trying to sell to increasingly-more-price-sensitive buyers.
Among the new wave of potential LNG exporters, most important to the issue of pricing are those in the US and Western Canada, where the source gas is likely to be priced on a spot basis, unlike gas elsewhere in the world which is generally priced (wholly or partially) on an oil-linked basis. Critically, the possibility of spot gas-linked contracts for North American LNG could upset the traditional LNG pricing structure.