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Liquefied Natural Gas (LNG) Global Market Trends and Analysis

By: Jeremy Bowden

What is LNG?

LNG stands for Liquefied Natural Gas and is a form of compressed and cooled natural gas.

LPG (Liquefied Petroleum Gas) is a by-product of processing natural gas and consists of propane, propylene, butylene, and butane. These are both natual products rather than from renewable sources such as biogas.

How is LNG Stored and Transported?

LNG is flexible enough to transport around the world in large tanker ships, in a similar way to oil, but at low temperatures.

As such, LNG links the large regional gas pipeline markets and major gas-fields around the world, providing a single global market for the commodity, which, in turn, influences regional kWh gas prices such as those in the UK.

Transporting LNG by sea in a large container ship

Transporting LNG by sea in a large container ship.

LNG Market Pricing Trends

Until recently, the LNG market had been small and confined to a few major buyers and sellers, mostly in Asia, which still dominates trade. But over the last few years, growth in gas demand and improved liquefaction technology have helped push volumes up sharply.

New LNG Market Fundamentals

This growth, combined with an influx of new players, has also increased liquidity and moved pricing away from traditional crude links, towards independent gas benchmarks, both in the LNG market itself (such as Platts JKM), and in liquid western pipeline markets such as NBP (National Balancing Point)/TTF (Title Transfer Facility) in Europe and Henry Hub in the US. Nevertheless, the LNG price is still strongly influenced by crude prices, as well as its own market fundamentals.

The Demand in the UK

The UK has four LNG import terminals - South Hook, Dragon, the Isle of Grain and Teesside - but since 2012 these have rarely been used at anywhere near capacity, reflecting the relative expense of LNG compared to local prices. This decision has left LNG contributing about a fifth of gas imports (see table 1); meeting 5-10% of UK supply. If NBP is below a certain level relative to prices in the big import centres of northeast Asia, it is often more profitable to divert cargoes from Qatar - currently the UK's main supplier - to Asia.

Table 1. UK Gas Imports 2010 -2017 (GWh)

Year Belgium Netherlands Norway LNG Total
2010 14 87 299 207 606
2011 4 69 250 275 597
2012 14 78 312 150 554
2013 35 82 319 103 538
2014 4 70 279 124 477
2015 2 36 308 152 498
2016 15 47 347 122 532
2017 29 21 393 80 524

Source: Digest of UK Energy Statistics - UK Gov

UK LNG Imports Expected to Increase

The UK's LNG imports have fallen over the last few years to be replaced by higher Norwegian gas imports, but they are expected to rise again in 2019. This trend is partly due to a long-anticipated global oversupply of LNG, as major new supply comes on-stream, particularly in the US and Australia. So far, most of the US LNG has headed to Asia via the Panama Canal, but firmer prices in Europe, combined with the additional supply could see higher imports from the US.

That is certainly the view of the Norwegian government, which has slashed its export price assumption for 2019 (Norway is by far the UK's largest overseas supplier, and Europe's second biggest, after Russia). It also raised the assumed 2018 gas export price by 11%, reflecting current tighter-than-expected markets. This trend suggests Norway will maximise exports this year and possibly ease back next.

Global Prices, Demand and Supply

LNG prices in Asia reached $12/mn Btu (about 90p/th, so way above underlying UK market prices) during the last winter, compared to 2016/17 winter prices of $10/mn Btu (see chart 1). But Asian spot prices are still well below earlier in the decade, when they ranged from $12-20/mn Btu (2011 to 2015). This underlying rise over the last year is down to firm oil and coal markets, as well as higher-than-expected demand.

Chart 1. International LNG prices 2015 - 2018 (1 mn Btu = 10 therms)

International LNG prices 2015 - present
Source: International Monetary Fund, World Bank, companies' reports, Bluegold Research

China Absorbs Global LNG Surplus

China has absorbed much of the additional supply from new capacity brought on-stream over the last couple of years; and last year it overtook South Korea as the world's second-largest LNG importer. Overall, China saw Q1 imports up 60% on Q1 2017, according to China's customs department. It's anticipated that this growth will continue as China continues to reduce coal use, with state oil giant, Sinopec, aiming to triple its LNG receiving capacity by 2023.

New Import Terminals Planned in Asia

There are also at least 14 LNG import terminals being planned or developed in south and southeast Asia, which, along with China, provides the bulk of anticipated growth in LNG demand over the next decade. LNG for marine bunkering could also see demand rise sharply, due to the introduction of tighter sulphur rules that make burning high sulphur fuel oil illegal from 2020.

Demand Met by USA and Australia

The additional global demand will mostly come from supplies from new export facilities due to arrive onstream especially in the US and Australia. These include Dominion Energy's Cove Point LNG terminal - the second to begin exporting after Cheniere Energy's Sabine Pass. Cove Point started production in March and sales deals include one to India's Gail in the first week of May to supply 12 cargoes over the coming months.

North America LNG Export Terminals

North America LNG Export Terminals.

There is also a large volume of new Australian capacity set to come onstream, including the Prelude and Ichthys floating LNG plants, which are now both poised to start. Chevron's giant Wheatstone facility exported its first cargo late last year and will ramp up capacity this year. And in Africa, Egypt will soon switch from importing to exporting LNG, while Cameroon is preparing its first LNG cargo from the Golar LNG-built Hilli Episeyo floating LNG facility, with Russia's Gazprom taking all the output. Yamal LNG in Siberia is also ramping up to full production.

Medium to Long-Term Forecast for LNG

Overall, most experts are still forecasting a supply surplus over the coming years, despite recent strong demand and firm prices. Whether or not this transpires, is likely to depend to a large extent on the behaviour of the world's two biggest economies - how much LNG the US can produce and export (successful shale development means the US has almost limitless low-cost gas available), offset by the extent to which Chinese demand and imports rise.

China's interest in reducing its trade surplus with the US through increased energy imports could advance plans for US LNG plants and sales. There are more than two dozen proposed US LNG plants waiting for customer commitments to reach a final investment decision, many of them looking to China for deals. Cheniere Energy approved the first US export facility since 2015 (when oil prices crashed) in May, and Texas LNG hopes to make a final decision next year on its plant, based on five early-stage agreements with Chinese customers.

A Growing Global Market

The strong LNG demand and rising supply reflects a fast expanding global market. In its latest annual report (pdf) released in April, the International Group of Liquefied Natural Gas Importers (GIIGNL) said global LNG imports in 2017 were up by 9.9% compared to 2016 - the highest annual growth rate since 2010, with total trade reaching 289.8mn mt.

Traders Are Setting New Benchmarks

The rapid rise in volumes, along with more short-term spot and flexible trade, means buyers and sellers are increasingly pricing against gas benchmarks, such as Standard & Poors' JKM or the NBP, rather than the JCC crude oil benchmark.

Latest Developments

Currently, LNG prices remain well above their level of this time last year, having strengthened over recent weeks after a sharp seasonal downturn in April. Asian LNG spot prices were at $9.20/mn Btu in the final week of May (for July delivery) - up more than 20% from a seasonal low in early April of about $7.50/mn Btu (which is about 55p/th, so would have been almost profitable to sell at current NBP Day-Ahead prices).

So, apart from a few extra cargoes in early May, the relative strength in Asia continues to limit LNG deliveries into Britain and Northwest Europe, adding support to prices here, and the latest rises will make it more difficult to attract supply further forward in the summer.

The current summer prices are the highest since 2015, having been driven up by crude oil, fuel oil and coal gains, along with LNG production outages, and especially continuing strong demand from key Asian consumers. In the GIIGNL's April report, it said demand from northeast Asian buyers had experienced a strong policy-influenced rebound, "which was not a given at the beginning of the year."

The consequent tightness in LNG markets has kept prices elevated and limited flow to Europe, contributing to higher prices in the UK than would otherwise have been the case (although this is partly offset by higher Norwegian supplies). Gas, like oil, is now traded in a truly global market, and developments in one part of the world can influence prices everywhere.

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