January 2018

Trends and Resources

Business Trends: The future of LNG—Part 1

Over the past several years, new gas processing/LNG capacity has surged in nearly every region. Growth on both the supply and demand sides has resulted in the announcement of billions of dollars of capital investment across the world. Millions of tons of new LNG import and export capacity have commenced operations, with hundreds of millions of tons still under development.

Nichols, Lee, Hydrocarbon Processing Staff

Over the past several years, new gas processing/LNG capacity has surged in nearly every region. Growth on both the supply and demand sides has resulted in the announcement of billions of dollars of capital investment across the world. Millions of tons of new LNG import and export capacity have commenced operations, with hundreds of millions of tons still under development.

According to the International Group of LNG Importers’ (GIIGNL’s) The LNG Industry: GIIGNL Annual Report 2017, global LNG trade has increased from approximately 239 MMtpy in 2014 to 245 MMtpy in 2015 to nearly 264 MMtpy in 2016. This trend represents a year-over-year (y-o-y) increase of 2.5% and 7.5%, respectively. In 2017, Bloomberg New Energy Finance expects total LNG demand to reach 280 MMtpy—a 6% demand increase from the previous year. LNG trade is expanding at a substantial rate, and is forecast to grow seven times faster than pipeline gas trade, according to BP’s Energy Outlook 2017. BP forecasts that LNG’s market share of total global gas trade will increase from 32% in 2017 to approximately 50% by 2035.

The global LNG export market has been dominated by Qatar, Australia, Malaysia, Algeria and Indonesia for the past 15 yr. Over the past several years, Australia has led the growth in new LNG export capacity. However, in the next decade, the US will significantly expand its liquefaction capacity and become one of the most prominent LNG exporters in the world (FIG. 1).

FIG. 1. Global growth in LNG supply to 2035. Source: BP.
FIG. 1. Global growth in LNG supply to 2035. Source: BP.

According to the International Gas Union (IGU), global regasification capacity is nearly 800 MMtpy, as of mid-2017 (FIG. 2). The Asia-Pacific region remains the main demand center for LNG consumption. Soaring natural gas demand for power generation will be instrumental in adding millions of tons of new LNG import capacity through the early 2020s (FIG. 3). The additional import capacity will come in the form of conventional onshore import terminals and the use of floating vessels (e.g., FLNG, FSRU, etc.).

FIG. 2. LNG regasification capacity (MMtpy) by country, 2016. Source: IGU.
FIG. 2. LNG regasification capacity (MMtpy) by country, 2016. Source: IGU.
FIG. 3. Global growth in LNG demand to 2035. Source: BP.
FIG. 3. Global growth in LNG demand to 2035. Source: BP.

Even with natural gas demand increasing around the world, LNG supply is outpacing demand growth. This imbalance has led to an oversupplied market, which is expected to last into the early 2020s. LNG buyers are renegotiating long-term contracts, as well as increasing short-term purchases and spot-market deals. The LNG glut has delayed multiple final investment decisions (FIDs), as LNG developers appear to be hesitant to invest in heavily capital-intensive terminal construction.

Part 1 of this global LNG overview will provide details on the LNG sectors of the Asia-Pacific region, Canada and Latin America. Part 2 will focus on Africa, Europe, the Middle East and the US.

Asia-Pacific

The region will not only be the leader in the construction of new refining and petrochemical capacity through the rest of the decade, but it will also witness the startup of millions of tpy of new LNG import and export capacity.

Japan and South Korea have long dominated the LNG import market, with Japan consuming more than 83 MMt of LNG in 2016 and South Korea importing nearly 34 MMt during that year. China and India’s presence in the LNG market has grown substantially over the last few years and will continue to shape LNG trade as demand increases. Southeast Asia is projected to become a net importer of LNG by 2035.

Asia’s LNG buyers are renegotiating long-term LNG deals and moving toward short-term and spot market pricing, as the large drop in oil prices from mid-2014 onward is making oil-indexed LNG contracts less relevant. LNG buyers are looking for destination flexibility in LNG cargoes, as well. Oil indexation is also becoming problematic as competition grows between sellers, as buyers become more price-sensitive, as energy deregulation expands, as competition from new gas pipeline projects increases, as spot market liquidity expands, and as the availability of LNG priced to the spot market increases. LNG project developers will find bilateral contracts more difficult to negotiate, and high-cost sellers will have trouble preserving their pricing power. These transitions are ultimately expected to improve LNG economics. LNG buyers moving away from long-term deals hurts the ability of LNG suppliers to secure the necessary financing to build LNG export facilities. This dynamic could lead to a shortage in LNG supplies in the mid- to late-2020s.

Nearly all of Australia’s downstream investments are going toward the nation’s LNG export projects. Multinational companies have invested nearly $200 B in LNG activities in Australia. This investment includes E&P activities, transmission infrastructure and the construction of several LNG export facilities. By the end of the decade, the country’s LNG exports are forecast to eclipse 80 MMtpy.

China is investing heavily in its natural gas sector. One of China’s major initiatives is to increase natural gas in the nation’s total energy mix from 5% in 2016 to 10% by 2020 and to 15% by 2030. To accomplish this goal, the nation is utilizing natural gas for power generation over coal. Domestic natural gas consumption has outpaced supply for several years, resulting in the need for additional natural gas pipeline infrastructure, along with a massive buildout of domestic LNG import capacity.

In 2019, China will begin to receive additional piped natural gas supplies from Russia with the completion of the Power of Siberia pipeline. The additional supplies of natural gas will add to the country’s massive LNG import scheme. According to the Energy Web Atlas, China has 16 LNG regasification/import terminals in operation, with a total installed capacity of more than 51 MMtpy (FIG. 4). According to the IGU’s World LNG Report 2017, China’s LNG import capacity is forecast to eclipse 100 MMtpy by 2023.

FIG. 4. LNG import terminals in China. Source: Energy Web Atlas.
FIG. 4. LNG import terminals in China. Source: Energy Web Atlas.

Due to a growing population and a rising middle class, India will see substantial growth in all areas of its downstream sector. The country’s “Make in India” program is driving refined fuels, petrochemicals and natural gas demand domestically. Complementing its thirst for crude oil and petrochemicals, India has the potential to become a hotbed for natural gas consumption over the next few years. India is striving to move the country to a more gas-based economy. Demand from gas-consuming industries, such as power and fertilizer, is rising steadily. This upward trend is the result of several factors that include the country’s “Make in India” program and its need to curb emissions. The country’s goal is to increase the share of natural gas in the country’s total energy mix from 6.5% to 15% by the end of the decade. To accomplish this goal, India aims to invest $100 B in its natural gas sector by the early 2020s. This ambitious target includes constructing new natural gas pipelines, completing the gas grid, building gas distribution networks to nearly 230 cities and adding processing centers and LNG import terminals. Investments in the country’s midstream and downstream sectors are imperative to meet burgeoning demand.

India has four LNG terminals in operation, with an installed capacity of 25 MMtpy. These terminals are located at Dahej, Hazira, Dabhol and Kochi. According to the Ministry of Petroleum and Natural Gas, the country plans to boost LNG import capacity from 25 MMtpy to 50 MMtpy by the early 2020s. However, the country must build additional natural gas pipeline infrastructure to distribute the commodity to domestic demand markets. India is also looking into utilizing LNG as a bunker fuel and transportation fuel to help curb emissions in inland waterways and populated cities.

Indonesia’s demand for natural gas is forecast to increase substantially until 2025. This demand growth is being spurred by the county’s 35-GW program. The country plans to add 35 GW of new gas-fired power stations by 2020. Between 2020 and 2025, the island nation is scheduled to add 45 GW of power generation capacity.

Since the country’s natural gas production has been in decline for several years, Indonesia will need to rely on imports to satisfy the rapid increase in demand. Due to the landscape of the island nation, Indonesia will rely on compact and small LNG and FSRU vessels to increase natural gas imports. This infrastructure will be built in Balikpapan, Java, Sulawesi and Sumatra. This program is part of the country’s move to attract more private-sector investment to develop the nation’s power generation needs. This ambitious goal will require an investment of more than $150 B, and includes the construction of gas-fired power generation, import infrastructure and transmission and distribution networks throughout the country.

Although the country has increased domestic natural gas production, Thailand still cannot keep up with increasing domestic natural gas demand. Natural gas comprises approximately 70% of the country’s power generation needs. The nation’s natural gas supplies are at a shortfall of nearly 9 MMtpy, according to BP, and Thailand’s natural gas demand is forecast to increase. According to Thailand’s Ministry of Energy, the country’s natural gas demand is expected to rise from 4.71 Bcfd in 2016 to more than 5 Bcfd by 2036. Coupled with that aspect, the country’s oil and natural gas reserves are decreasing, and piped natural gas from Myanmar may soon cease flowing—Myanmar is using more natural gas to meet domestic demand and has planned to provide China with additional natural gas supplies. This predicament has left Thailand with very few options other than LNG imports.

The country plans to significantly boost its imports of LNG from approximately 5 MMtpy in 2017 to 20 MMtpy by 2025, according to its Ministry of Energy. By 2036, LNG imports could reach nearly 35 MMtpy. The dramatic forecast in LNG imports has spurred the construction of additional LNG import infrastructure. The Thai government has also liberalized its natural gas market to allow third-party suppliers to participate in the country’s natural gas infrastructure buildout. The nation’s LNG import buildout includes:

  • Doubling the capacity of the Map Ta Phut LNG import terminal to 10 MMtpy in 2018, along with a separate project that could raise the terminal’s capacity to 11.5 MMtpy by 2020.
  • Installing the nation’s second LNG import terminal. If greenlighted, the $1-B, 7.5-MMtpy terminal would begin operations in 2022/2023.
  • Installing an FSRU in neighboring Myanmar. The facility would link into natural gas pipelines that would ship natural gas supplies to Thailand.
  • The installation of a 5-MMtpy FSRU in the Gulf of Thailand.

These projects will allow Thailand to substantially boost its imports of LNG. The additional supplies are imperative to meet future demand.

The Philippines’ natural gas demand is expected to triple by 2040. The majority of this demand is due to new gas-fired power generation plants that the country intends to build. However, the country’s domestic natural gas production is not enough to satisfy demand. To increase natural gas imports, the country will install a $2-B LNG import terminal in Batangas Bay. The plant will include the construction of a 200-MW power plant. Additional LNG import projects include First Gen’s $1-B, 3-MMtpy onshore LNG terminal (which may utilize an FSRU in the interim), and the startup of Energy World Corp.’s Pagbilao LNG import terminal.

In September 2017, Sri Lanka approved the construction of a new LNG regasification terminal. The facility will be near Colombo. The imported natural gas will be used for power generation; however, operations are not likely to begin until after 2020.

Bangladesh has ambitious plans to build out its LNG infrastructure. The country needs additional natural gas supplies to fuel its gas generation plans. Bangladesh plans to double its power generation capacity to 24,000 MW. To provide enough feedstock for these facilities, the country plans to add a significant amount of new LNG import capacity. Two FSRU vessels, with a total capacity of 7.5 MMtpy, will begin operations by 2019. These vessels will be located near Moheshkhali Island in the Bay of Bengal. The country is also working with India’s Petronet to build a 7.5-MMtpy onshore LNG receiving terminal. Two additional FSRU vessels have been announced, but no timetable has been provided for their construction. Lastly, Bangladesh is conducting site selections for up to five additional land-based terminals.

Canada

The majority of the country’s proposed capacity additions are within the gas processing/LNG sector. Due to the US shale gas boom, Canada has lost a major revenue stream. Historically, Canada has exported almost all its excess natural gas to the US by pipeline. To offset this financial hit, the country has announced more than two dozen LNG export terminal projects. In total, Canada has announced nearly 300 MMtpy of LNG export capacity at a total cost of more than $170 B.

To export LNG, these producers must submit an application to the country’s National Energy Board (NEB). At the time of publication, Canada’s NEB has received more than 40 export license applications since 2010, and has approved 35. The majority of the nation’s LNG export terminal projects are located on the country’s West Coast in British Columbia (BC). This province accounts for more than 250 MMtpy of LNG export terminal capacity. The total cost of these projects is nearly $150 B. The country’s East Coast has announced more than 42 MMtpy of LNG export capacity at a total cost of more than $20 B.

Canada has the potential to become a global leader in LNG production and export, but the nation’s projects are literally at a standstill. Only one Canadian LNG project has begun exports—FortisBC’s Tillbury plant exported the first Canadian LNG shipment in late 2017—with nearly all of the remaining projects delaying FIDs. In BC, only the Woodfibre LNG project has reached a positive FID, but other LNG projects, such as the Douglas Channel LNG, Aurora LNG, Triton LNG, Pacific Northwest and Prince Rupert LNG projects, have been abandoned. It is unlikely that any of the province’s terminal projects will see completion by the end of the decade.

Latin America

Like much of the rest of the world, Latin America is focusing on gas for power generation. Recent trends in industrial power production include combined-cycle plants and steam turbines. The region’s gap between natural gas supply and demand has continued to grow, and will likely continue unless additional investments are made in more E&P activities. Many Latin American nations have announced additional E&P activities, but these operations will take time to materialize. In the short term, many Latin American nations will continue to rely on piped natural gas and LNG imports to satisfy demand.

Brazil’s demand for natural gas has doubled in the past decade. The country’s natural gas demand has increased from 18.5 MMtpy in 2006 to more than 37 MMtpy in 2015, according to BP. Due to the country’s recession, natural gas demand decreased to nearly 33 MMtpy in 2016. The country relies heavily on hydroelectric power for electricity generation. However, natural gas has been gaining in prominence as a way to subsidize power generation during droughts. Since natural gas is a more reliable source for power generation, Brazil has increased its investments in both gas-fired power generation plants and natural gas import infrastructure. However, the country’s LNG imports have been sluggish since 2015. A large part of this fall in LNG imports is due to cheaper piped gas from Bolivia. In the short term, Brazil’s LNG imports are likely to remain small.

In Jamaica, the Old Harbour LNG project will utilize an FSU to receive LNG imports. The imported natural gas will act as a feedstock for a 190-MW gas-fired power plant in the area. This gas-fired plant will replace the oil-burning plant in Old Harbour, and allow the country to reduce its dependence on burning oil for electricity generation. The facility is expected to begin operations in late 2018.

Panama is building a new LNG import terminal in Costa Norte. The $1.1-B LNG-to-power project includes the construction and installation of an FSRU, transmission infrastructure, storage tanks and a 350-MW combined-cycle power plant.

To shift from the use of fuel oil and diesel for power generation to natural gas, Puerto Rico has proposed the Aguirre Offshore GasPort project. The project will utilize an FSRU moored 4 mi off the southern coast of the country. The facility will provide natural gas to the Puerto Rico Power Authority’s Central Aguirre Power Plant. HP

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