Global LNG:Feedback from LNG18conference

Last week, we attended the LNG18 conference in Perth. The conference, heldevery three years, brought together the ‘who’s who’ of the industry. While thetone of the conference was reasonably upbeat, the messaging roundly reflectedcurrent market dynamics: buyers appear to be taking advantage of theoversupply to impose shorter durations and more flexible terms on newcontracts. The big issue for producers is these terms are not conducive to fundlarge-scale project development. It appears likely that it is only a matter oftime before a more liquid spot trading market will develop, with sales not onlong-term contract now up to 29% of the market.

    Theme 1 – Long-term demand to be driven by policymakers: Producersremained confident of longer-term LNG demand growth; however, the keydriver is the relative cleanliness of gas-fired power generation compared tocoal. With coal still more economic, government intervention (such as theestablishment of carbon pricing schemes) is likely required to lift demand.

    Theme 2 – Producers looking to new markets to boost demand:Notwithstanding traditional sources of demand, producers are taking ondeveloping both new geographic markets and new uses for LNG. Whileencouraging, we do not see these new markets appreciably impacting thecurrent oversupply in the market for some time.

    Theme 3 – Japanese customers pushing for shorter-term contractlengths and greater contract flexibility: Driven by uncertainties over theoutlook for domestic gas use (due to deregulation of electricity markets andthe timing of nuclear reactor restarts), Japanese utilities are looking toshorten contract durations to pass the risk onto producers.

    Theme 4 – A lack of large-scale development could exacerbate thecycle: A clear message from the producers was that shorter-term contractsare not conducive to large-scale development. As demand catches up tosupply (sometime into next decade), the lack of development could result ina significant tightening of the market and higher prices.

    Theme 5 – LNG prices likely to dislocate from oil-linked contracts overtime: We believe most participants recognize the need for LNG to dislocatefrom oil-linked contracts. The issue is the depth and liquidity of spotmarkets. In our view, shortening contract terms should act as the impetus forthe establishment of traded spot markets – albeit on a regional basis.

    Theme 6 – Europe remains the balance point for uncommitted cargoes:European LNG imports have declined in recent years, but a deep and liquidnatural gas market and a sufficient regasification infrastructure means thatthe region will likely become the balance point for the commodity as newuncommitted cargoes (particularly from the US) come onstream.

    Theme 7 – China could represent a long-term growth opportunity: Chinahas pledged to reduce carbon emissions by 2030 and the adoption of newpolicies on green development should see the percentage of gas used in energygeneration increase from 6% today to 10% by 2020, with gas consumptionpotentially increasing at 7-9% per annum for the next five years.