The influence of new LNG importers on the global market04 Jun, 2012
There will be over 30 LNG importing countries by 2015, double the number ten years earlier. New regions have emerged to challenge the traditional markets of Asia, Europe and North America. Greater geographic diversity and volume of import capacity is substantially increasing the range of factors that can exert an influence over the global gas market. While it is easy to get immersed in the detail of global market fundamentals, a top down framework to understand the drivers of inter-regional pricing can yield an accessible insight into the impact of these new sources of demand.
New regions challenging the dominance of large buyers
Chart 1 illustrates the rapid increase in global regasification capacity over the last decade. Latin America, Argentina, Brazil, Chile and Mexico have developed regasification terminals while in the Middle East, Dubai and Kuwait have emerged as big LNG importers. In Asia, countries such as Malaysia and Indonesia which had been exporters of LNG, have recently become importers as their own domestic gas reserves have declined. But the most significant development impacting global LNG demand, has been the emergence of global growth powerhouses China and India as LNG buyers (we explored the dynamics behind Chinese LNG demand here).
Chart 1: Development of LNG import terminals and importing countries
The key drivers behind the projected growth in demand for LNG imports are straightforward: energy intensive economic growth in developing economies and an increasing preference for gas as the fuel of choice for power generation. The global shift towards gas for power generation has primarily been the result of an environmental policy driven switch away from coal fired generation, to address carbon emissions in the developed world and local pollution issues in the developing world. This is despite the fact that coal fired generation is currently significantly cheaper than gas on a marginal cost basis in many regions. The extent to which the closure of nuclear capacity results in the development of new gas fired capacity will also be a factor.
LNG import growth has been facilitated by a rapid expansion in global regasification capacity. In many cases this has been justified on the grounds of security of supply, with supply source diversification increasing a country’s ability to manage geopolitical risks and flexibility to manage supply chain shocks.
Another driver behind the rapid growth of regasification capacity is the relatively low barriers to entry. Regasification capital costs are typically only a fraction (approx 10%) of the cost of liquefaction capacity, so developing import terminals creates a (relatively) “cheap option” to import LNG. The development of the Excelerate floating LNG storage and regasification units (FSGU) and dockside regasification terminals have also lowered the costs and lead times for developing import infrastructure. Excelerate currently has nine FSGUs (which can also act as conventional LNG tankers) serving terminals in Argentina, US, UK, Kuwait and Brazil.
Implications of greater depth in the LNG demand side
The growth in global regasification capacity has substantially increased the depth of the LNG demand side, both in terms of geographical diversity and volume. The development of regasification capacity represents an option to import LNG. But the actual level of imports into a regas terminal will be driven by local gas market dynamics, particularly the marginal value placed on increasing volumes of imports. This adds to the complexity of global LNG demand dynamics.
It is tempting to conclude that the task of analysing global LNG market fundamentals requires a large and complex modelling capability. However while companies with direct exposure to the new geographies will require a detailed understanding of the fundamentals in these markets, the impact of regasification capacity expansion on the global LNG market can be analysed at an aggregated level.
The level of influence of any one country on the global market will clearly be constrained by the size of its import capacity. What is important is to understand the drivers behind the level of LNG imports and regas capacity utilisation and how uncertain or dynamic they are likely to be. For example, regasification capacity is currently unconstrained in many regions which dampens the impact of new facilities. Similarly, if import capacity is backed against long term contracted cargoes, its potential influence on global market dynamics will be limited. On the other hand, competition from alternative sources of flexible gas supply and energy substitution capacity (primarily in the power and heating sectors) can lead to large variability and uncertainty in the level of LNG imports. As an example, the volume and timing of Japanese nuclear capacity coming back on line will have an important influence over the global LNG market over the coming 12 months.
Ultimately inter-regional market price dynamics will drive global LNG flows and trade. In turn, regas capacity utilisation will largely be driven by changes in regional price differentials and relative transportation costs, as has been witnessed recently with large volumes of European cargoes diverted to Asia. So in order to analyse the impact of this new regas capacity on the global market, the greatest return on analytical investment comes from developing a ‘top down’ framework to understand the evolution of regional pricing dynamics in the context of the contractual obligations that influence LNG pricing and flow. That is not a task that requires a team of analysts armed with a supercomputer.