Global LNG trade in 2013 was consistent with our view that the market is tightening as new production plateaus at a time of rising demand in Asia.
On current industry estimates 240 million tonnes of LNG was delivered in 2013, a negligible increase (only 1.1 million tonnes)over 2012 volumes. Supply remains stalled at 2011 levels after a large increase in production (59 million tonnes) from 2009 to 2011. This puts the industry in the midst of a LNG supply hiatus, as we had previously forecast.
Flat-lining supply growth was seen despite a year-on-year increase in production from several important exporters, notably Qatar, Malaysia, Australia and Yemen, plus the addition of two new production trains in Algeria and Angola. The higher output from Qatar and Malaysia was possibly related to less planned maintenance in 2013. At the same time, Australia benefitted from a full year of production from Pluto LNG and Yemen had fewer attacks on its pipeline infrastructure.
However, the new LNG trains in Algeria and Angola did not contribute significant new volumes. Overall, production in Algeria remained at 2012 levels while in Angola the plant had delays starting up.
Unplanned outages, in particular in Nigeria, and a continued decline in production, most markedly in Egypt, weighed on supply, keeping overall volumes flat year on year. We estimate industry production – on a delivered basis – represented 87% of nameplate capacity in 2013.
In contrast, the demand side of the industry continued to grow and diversify, particularly in Asia. Ten new re-gasification terminals started operating in 2013, while three new LNG importing markets emerged; Israel, Singapore and Malaysia. Imports to Asia increased again, albeit at a slower rate than in recent years with a rise of 11.4 million tonnes. This tempering of growth was primarily due, as we had forecast, to Japan approaching a ceiling on both the volume of LNG imports it can physically accommodate and its combined-cycle-gas-turbine power station capacity.
Asia’s ability to pull volumes is reflected in long-haul trade which continued to flow from the Atlantic Basin to the Pacific Basin; 22.7 million tonnes was transported via this route in 2013, a slight increase (0.4 million tonnes) from the year before.
European LNG imports: 2010 to 2013
Figure 1: Global LNG trade was effectively flat year-on-year. As a result, growth in Asia and Latin America meant fewer imports to Europe, the US and Canada in 2013 compared to 2012.
Source: BG Group interpretation of IHS Waterborne data (Feb 2014), delivered volumes.
Growth was concentrated in China and South Korea but the newer south-east Asia markets of Singapore, Malaysia, Thailand and Indonesia were also important, with volumes to those countries increasing in aggregate by 3.7 million tonnes. Demand also increased in Latin America, with Mexico and Brazil showing the third and fourth strongest year-on-year growth respectively.
Gas demand in Europe remained subdued and this, in combination with increased pipeline supplies, provided LNG volumes for the global market to balance. As expected, Asian and Latin American were the markets which again pulled LNG volumes from Europe.
In 2013, Europe had net LNG imports of 35 million tonnes – its lowest volumes since 2004 and well below the 66 million tonnes in the peak year of 2011. At the same time, Europe also re-exported 4.1 million tonnes, contributing further to the lower volumes; Spain accounted for just under half of all cargoes reloaded worldwide. Nine importing countries can now also re-export LNG; in total 4.4 million tonnes was reloaded and sent to other destinations in 2013, up from 3.5 million tonnes in 2012.
LNG spot prices in Asia (and Latin America) stayed high, reflecting underlying tightness in the industry and reinforcing our view that the volumes were “pulled” away from Europe. In this environment, Asia was the predominant price-setting region for spot LNG cargoes.
On average Asian LNG spot prices increased by just under $1/mmBtu from 2012, despite crude oil prices falling nearly $4.50/bbl on average. After a strong, weather-driven, late-winter peak in spot prices in March ($19.18/mmBtu), a muted summer peak of $16.00/mmBtu followed in September. We believe the subdued summer high was the result of a year-on-year improvement in LNG production in August through October and buyers holding high inventory positions in anticipation of low nuclear capacity in Japan through the summer.
Post summer, prices were robust through the autumn “shoulder” period, reflecting concern about underlying market tightness and cargo availability, before rising to nearly record levels by January 2014.
Gas and LNG prices: 2012 to 2014
Figure 2: After reaching record highs in March, Asian LNG spot prices reached a muted peak in summer 2013, before rallying strongly into the first quarter of 2014. Prices for January 2014 onwards are forward curve prices.
Source: Platts, Heren, Petroleum Association of Japan and Bloomberg; as of 6 Mar 2014
New LNG trains entering production in Australasia in 2014 represent the start of the next major supply wave; around 60 million tonnes of new capacity is currently under construction or in commissioning in Australia with a further 7 million tonnes in Papua New Guinea. The timing of the new capacity will be a key to market supply over the next few years.
For 2014 we expect, once again, a modest increase in new LNG supply, despite the ramp-up of production at Angola and the start of new trains in Algeria, Papua New Guinea and BG Group’s own Queensland Curtis LNG project in Australia. Overall supply performance will again depend on unplanned outages and continuing declines in gas supply from existing plants.
Turning to global markets, our view that LNG demand will grow at 5% to 2025, twice as fast as for gas overall, is unchanged. In 2014 we expect continued growth in demand for LNG from Asia, albeit at a slower rate than in previous years. Japan’s demand is now limited by the capacity of both its LNG importing infrastructure and combined-cycle gas-turbine power stations. The return of some nuclear capacity looks likely this year.
But we believe it will initially replace oil and oil products and have limited impact on LNG. Japan has some new gas-fired power generation due to start this year, which will add to demand. Elsewhere, another strong increase in LNG imports to China looks likely in 2014 as two new import terminals are introduced and long-term supply contracts begin.
Finally, we expect Latin America to continue to show robust demand, the extent of which will depend upon whether the drought of the last few years continues, impacting hydro-electrical generating capacity. Elsewhere, four new markets in Europe and the Middle East are planning to start imports this year; Poland, Lithuania, Jordan and Egypt. Europe will continue to balance the global LNG market, with volumes likely to be “pulled” to regions where spot pricing is higher.
European LNG imports 2010 – 2013
Figure 3: European LNG imports have declined steadily since early 2011, reaching a nine-year low in 2013 as Asian and Latin American demand continued to grow.
Source: BG Group interpretation of IHS Waterborne data (Feb 2014), delivered volumes.
It’s not clear how much more LNG can be diverted before Europe reaches a minimum level or floor to its imports. When that happens, LNG supply is likely to be drawn from other, more price sensitive markets in periods of peak demand; these markets may replace Europe as counterweights for global LNG demand and supply.
Spot prices will remain robust through 2014 (assuming “normal” weather), reflecting market tightness. Other than weather, key variables include the rate of gas and LNG demand growth in China, operational performance of LNG suppliers, the return of nuclear units in Japan and the potential that European imports may reach a floor.
In summary, industry performance in 2013 and the outlook for 2014 remains consistent with our long-held view that the global LNG market continues to tighten and indeed will remain supply-constrained and tighter for longer than many industry observers assume, until the end of the decade at least.
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