The latest data from the world’s largest LNG importers points to a market will suit buyers over the next five to 10 years, with supply outstripping demand and spot prices lower than they have been for a few years.
Producers and marketers will find the going tougher as both demand and prices decline and the customer landscape changes, from 3 countries making up ~ 60% of LNG imports to more than 33 countries with LNG import facilities, making it imperative for them to adjust their strategies now.
The common view five years ago was that Asian demand would drive LNG growth, which prompted producers in Australia, the Middle East, Africa, and North America to invest heavily to meet that expected demand.
In Australia alone, producers have invested more than US$250 billion since 2009 to create what soon will be the world’s largest, most modern and most technologically advanced LNG industry.
But it comes as LNG demand declines and many long-term gas contracts in Asia approach expiry.
Additionally, there is the U.S. shale gas that will be exported as LNG. The volume, flexible nature and cost of this supply coupled with new players who are not vertically integrated changes the game for vertically integrated producers. New players—such as the independent Cheniere Energy—will disrupt global LNG trading.
Producers and marketers need to act now to increase their competitiveness in a market where supply will exceed demand, where markets are more global (we are already seeing the influence of HH contract structures and pricing) and where customers are geographically diverse and numerous. They will succeed if they can bring LNG to the market in a cost-competitive way, can optimize their contract and asset portfolios, can encourage new applications for natural gas, and are agile enough to take advantage of the next opportunities.
There are six core actions LNG producers and marketers will need to consider in preparation for this changing market:
Protect market share in Japan, South Korea, China, and India. Although a large number of long-term contracts in Japan and South Korea are due to expire before 2020, Japan and South Korea will still have some of the largest customers. Those with these contracts need to protect this market share, and those marketers of LNG who are looking for an opportunity, buyers in Japan and South Korea will certainly be contemplating whether to renew long-term contracts, how much demand to leave spot, and how to build capability to clear excess supply. Although the government targets for LNG growth in India seem unrealistic, there is, nonetheless, a lot of potential for LNG growth in India, at the right price.
Prepare for a very different competitive landscape, where non-traditional players export and trade U.S. LNG. The LNG volume that will be available from the U.S., coupled with the current excess supply, will drive a bias towards trading as owners and marketers of LNG compete for buyers and opportunities.
Diversify to include other markets and smaller customers. Perhaps the biggest change in how producers and marketers operate will be how these players interact with customers. More countries, smaller customers, and smaller volumes/contracts/shipments in Asia, Europe, the Middle East, and Latin America are emerging. Servicing these customers require a different operating model as the cost to serve each customer in the current model would not work.
Build flexibility into contract portfolios, in the form of trading and midstream options. Access to port infrastructure, midstream pipelines that will deliver the LNG to customers and management of risk all become so much more important as LNG customers move more demand to short-term, flexible contracts or develop their own trading capabilities.
Invest in science, technology, and engineering for small-scale LNG, and new applications for LNG. We are already seeing small scale liquefaction and other technologies that support smaller plants and shipments and applications become more cost competitive. Additionally, data and digital technology have had an impact on the operational effectiveness and efficiency of many heavy industries. LNG is not an exception.
Drive down the cost of delivering LNG. The LNG development costs in many markets—Australia and Canada, for example—were much higher than they needed to be and services costs were inflated. There are still significant opportunities to reduce costs in these operations, as has already occurred in many onshore U.S. developments.
It looks like the global gas market is here, accelerate by unexpected circumstances- U.S. LNG supply resulting in a market where supply will exceed demand for the near future, removing historical barriers to entry of access to supply and infrastructure, and enabling the entry of non-traditional players and traders. Producers and marketers that embrace the above actions will have a stronger chance of survival in this competitive new age of uncertainty.
For more insights explore part 1 of Accenture's LNG report series: Gas Grows Up: Developing New Sources of LNG Demand.