A shift in focus

The demand for LNG is driven by the need to bring gas reserves to the market. This demand is a function of increased natural gas consumption through economic growth and fuel switching and it is driven by the remoteness of many of the large reserves. In the future, natural gas will play an increasingly significant role in meeting the world’s energy demand. In the short-term, a combination of plummeting oil prices and a sharp fall in the Asian economic growth forecast has sent the LNG spot price falling fast, given that Asia is the key region of demand growth. Low hydrocarbon prices remain a concern within the LNG market, as most LNG contracts are linked to oil prices. Furthermore, LNG project developments are vulnerable to capital constraints from the decline in oil and gas prices, given that liquefaction projects are very capital intensive.

CAPEX on LNG facilities has risen substantially in recent years, mostly due to growth in the global economy, which has been driving demand for natural gas. Douglas-Westwood (DW) forecasts that this trend is to continue, with total expenditure on global LNG facilities expected to reach US$241 billion between 2016 and 2020. This represents a 34% increase compared to the preceding five year period. 

Market overview

Global LNG CAPEX has been dominated by Australasia and Asia in recent years, but over the forecast period most regions are expected to experience positive growth. The exception is Australasia, where the LNG construction boom looks to be coming to an end, as the country prepares to enter a new production phase. It is important to note that there have not been any final investment decisions (FIDs) on any Australian LNG projects since 2012, signalling limited construction activities of new LNG facilities over the next few years. The US now has vast potential as an LNG exporter. This dominance is attributed to the region’s shale gas production and export plans. However, the approval process for onshore projects remains slow and will limit the growth rate of LNG expenditure in the region over 2016 – 2020.

The global LNG CAPEX outlook to 2020 is characterised by this regional change in focus. The weaker projected expenditure in 2016 is a result of a pause in commitments to new LNG projects, as demand growth in Asia has weakened and gas prices have slumped. By far the largest proportion of the total expenditure will be attributed to liquefaction projects, which account for 66% of spend over the forecast period. Import facilities will constitute 21%, whilst spending on LNG carriers will represent 13% of total expenditure between 2016 and 2020.

Regional overview – Asia

Asia will maintain a fairly constant share of approximately 32% of the total LNG CAPEX over the forecast period. In the region, CAPEX will mainly be focused on regasification facilities.

Over the hindcast of 2011 – 2015, Asia had the highest expenditure on import facilities, accounting for 83% of total global spend on regasification facilities. This was driven by South Korea and Japan in particular, with gas imports increasing in the wake of the nuclear shutdown. Over the forecast period, Asia will continue to be the largest investor in import facilities, maintaining a 75% share of global import facilities’ CAPEX.

Regasification projects will make up 50% of total CAPEX for the region over the forecast period. This will predominantly be driven by an increase in import projects by the major energy importers of Japan and China. Furthermore, DW expects China and India – both heavy energy consumers – to increase development in import terminals, as a result of increasing global pressure to reduce emissions. China is seeking to develop its shale gas reserves for domestic consumption, but this is not expected to come onstream in the near future.

Over the forecast period, the construction of LNG carriers will account for 39% of the total expenditure in Asia. This portion is highly susceptible to broader macroeconomics, as the carrier market is dominated by South Korean and Japanese yards.

Liquefaction expenditure will account for 11% of the region’s total spend over the forecast period. This will be focused in Indonesia and Malaysia. Projects coming onstream over the forecast period include the four Sengkang trains and the ninth train in the Malaysia LNG (MLNG) project. As domestic consumption increases, however, there will be less gas available for export. A key project expected after the forecast is BP’s Tangguh Train 3, with its FID already postponed a number of times in light of the reduced oil price conditions.

It is pertinent to state that LNG spend in Asia is not evenly distributed. Countries in South and Central Asia will not have any expenditure on liquefaction or the construction of LNG carriers assigned to them over the forecast period. India will be the only bright spot, with plans to build a number of new import terminals, including Gangavaram Port, Jaigarh LNG, Katupalli LNG and Mundra LNG by 2020, whilst also expanding the Dahej import facility by 2016. The hope of Sri Lanka building an import facility over the forecast period looks to be diminishing, as the government regulatory authorities have failed to grant development approval.

Conclusion

In the decades ahead, natural gas will play an increasingly important role in meeting the world’s energy demand. It will continue to be a vital influence in answering Asian and European gas needs and will require liquefaction due to the remoteness of new large gas reserves. The demand for LNG will continue to grow in the long-term due to its widely applicable use as a fuel source for power generation, industry and commerce. The long-term potential of the LNG industry is evident as vast reserves of natural gas found in remote regions such as East Africa and the Arctic present considerable LNG opportunities for the future.

This article was originally published in the February 2016 issue of LNG Industry. Sign in to read the full issue or subscribe today.

Written by Mark Adeosun, Douglas-Westwood, UK. Edited by Callum O'Reilly

Read the article online at: https://www.lngindustry.com/small-scale-lng/09022016/a-shift-in-focus-1977/