It is generally believed that the shortage of pipeline gas will lead to additional demand in the LNG market. In the general case, this is true, but the time factor turns out to be key. After all, gas is needed here and now, and new LNG can be provided only in five years. But will this new LNG be really needed in five years in excess of planned volumes? As always, there are many uncertainties, but we propose to speculate on this topic.
News first. The other day it became known that two buyers at once – trader Vitol and Shell , which needs no introduction , terminated contracts for the purchase of LNG from the future American liquefaction plant Driftwood LNG. The event again postpones the adoption of an investment decision on this project, and, accordingly, the full start of construction.
Here, however, it is worth noting that the price conditions in the contracts were tied to the prices of the LNG spot market in Europe and Asia , that is, LNG buyers under these contracts did not benefit from the relative cheapness of gas within the United States . One way or another, Driftwood LNG is again shelved, and there is no certainty about other new projects either. After the go-ahead for the construction of two plants in May and June (for a total of 22 million tons per year), new investment decisions are not being accepted, despite the fact that it is now difficult to expect noticeable volumes of new LNG from somewhere other than Qatar and the United States.
We emphasize once again: on the one hand, it is heard from everywhere that American LNG will benefit from the current situation in Europe, but there are not so many decisions on new plants. There is most likely no over-optimism for LNG in the long term on the gas market. What could be the reason for this paradox?
We have already discussed the simplest answer a little earlier: the uncertainties of the future of Russian pipeline exports to Europe make it difficult to make decisions on new LNG plants, since it is difficult to predict the future balance of supply and demand. To put it simply: what if exports recover, and new LNG aimed at Europe turns out to be superfluous.
But now the situation has changed somewhat. After recent explosions and leaks on at least three of Potok’s four lines, the chances of recovering exports to Europe are becoming even slimmer. What follows from this? First, we note that in this discussion, for the time being, we leave out the scenario of a sharp increase in transit through Ukraine . Although this option is theoretically and technically possible, it implies a significant reduction in tension between all European parties to the conflict, including Kyiv.
If this does not happen, then Russian gas will be locked up for five to ten years, while the construction of new gas pipelines to China . But it takes about the same amount of time to build new LNG plants of comparable capacity in the US or somewhere in the world.
So, whether you like it or not, the world will have to shrink in gas consumption for this period, replacing it with all possible surrogates (probably, in the first place it will turn out to be coal, as well as burning oil products already outside the transport sector).
So, let’s imagine that the world is forced to reduce gas consumption. Five to ten years pass and Russian pipeline gas enters the Chinese market. And if LNG, which, in theory, was supposed to compensate for the Russian deficit, enters the global market at the same time, a new surplus will arise. Price collapses are also feared by market participants, especially at a time when both the sustainability of low domestic gas prices in the United States and the cost of production in other regions of the world, with the exception of Qatar, are in question, which directly affects the cost of LNG itself.
In fact, the main question is whether the world will be able and willing to quickly bounce back and sharply increase the amount of gas consumed after several years of forced savings in order to absorb the double amount of additional supply. This is especially true for Europe, which already announced in its plans a gradual reduction in the share of gas.
True, it would seem that China and other Asian countries are always ready to increase volumes at a good price. But here, too, not everything is so simple. If in Europe there is an infrastructure that will not be fully used now, then in the Asia- Pacific region it is only being created for a gradual increase in demand for gas. That, in turn, will make it difficult to quickly increase demand for gas, even if there is an excess supply.
And of course, another important circumstance for China is the guarantee of supplies. Again, after the explosions at Nord Stream, which were considered a reliable source of gas supply, the likelihood that under certain circumstances it would be difficult to rely on LNG, especially through southern routes, only increased.
China this year is known to have greatly reduced its consumption of LNG, with imports down 20% in the first seven months of the year . The high price played its role. But it is possible that in the face of growing international tension, the PRC, in principle, does not want to increase its dependence on imported liquefied gas.
It is curious that a month ago the story was discussed : Europe quickly filled its gas storages, including because Chinese companies resold to it part of their LNG, and of Russian origin. But there is nothing unexpected in this. The LNG market is global, and as a first approximation, only the total volume of supply is important. And in any case, all redistributions will be made by the market (not Chinese, but other traders), focusing on the price difference.
In any case, in recent years, the topic of competition between Russian LNG and pipeline supplies to Europe from Russia has already been raised. Like, Russian LNG interferes with gas supplies from Russia. But now a similar question, only “on the contrary”, is already appropriate to discuss in the context of the Chinese market. It is clear that new pipeline exports to China will be protected by long-term contracts. The question is whether there will be room in China for new Russian LNG if there is a lot of pipeline gas exports. Moreover, China is trying to geographically diversify its sources of raw materials. True, LNG supplies, for example, from Qatar and Russia, look more reliable than American supplies in the scenario of worsening relations between the US and China.
Let’s summarize. Even assuming that Russian exports to the EU do not recover, the medium-term prospects for the LNG market look ambiguous. Of course, the market will grow in any case, but within the planned volumes, and not to compensate for Russian gas. In this forecast, the current moderate activity in the construction of new plants looks more logical. Plus, China may be careful with increasing LNG imports from countries that are not friendly enough.
In the longer term, the future of the gas market in general and the LNG market in particular will be determined by progress in the implementation of renewable energy projects. Opposite signals are traditionally received here: on the one hand, the current growth rates of the sector are quite good, on the other hand, possible physical limitations (associated with mining) if the same growth rates are maintained.
In conclusion, we recall that recently the consulting company Rystad Energy published its long-term forecast for the development of the LNG market, according to which the “peak LNG” (that is, the maximum demand for this product) will take place as early as 2034. The volume of the market at the peak, however, is planned quite decent – over 700 million tons per year (now – about 400 million). It is curious that a significant part of this growth has not yet been confirmed by specific projects at all. How it will be, we’ll see. But it can also turn out the other way around: against the backdrop of the problems discussed above, we will see a slower, but long-term growth of the market. That is, a sustainable gas age, especially if the pace of the energy transition still slows down.
