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Focus on the LNG market

24/04/17

Recent developments on the LNG markets show a strong interest from the Oil and gas majors for FSRU projects, rising LNG imports in MENA and the continuation of the worldwide liquefaction capacity growth.

First Quarter 2017: price hikes in Europe before easing

The first month of the year has proven to be tight on the LNG supply front in continuation of the end of 2016. In Asia, technical failures at the Gorgon liquefaction plant lead to the biggest climb in prices in four years. Spot cargo prices for delivery in February reached $9/MMBtu. Due to exceptional cold weather in Europe, prices have also encountered spikes in the beginning of the year in the Atlantic Basin, trading at a premium by 1$/MMBtu prices over the Pacific basin and making it more difficult for Asian markets to attract LNG to cover their unforeseen and additional needs. Other setbacks such as Qatar's Rasgas issue at train 7 of the Qatari project or difficulties to load a cargo at the Skikda plant, have not helped to ease the pressure on prices in this period. Since then, prices have fallen in the shoulder months and the differentiel between the two basins has reversed and shrinked to less than 1$/MMBtu, with Asian prices around 5,3 $/MMBtu.

Evolution of the worldwilde liquefaction capacity 

2016 has seen 19 bcma (14 Mtpa) of additional capacity coming online among which APLNG Train 2 and Gorgon Train 1 and 2 in Australia, Sabine Pass 1 and 2 in the US. In 2017, liquefaction projects expected to be commissionned should reach 14 bcma (10 mtpa), among which Gorgon Train 3, Yamal Train 1, Sabine Pass Train 3 and the first ever floating one with the FLNG Satu in Malaysia.

Middle East demand

On the demand front, MENA (the Middle East and North Africa), is the area where LNG imports growth is the highest in the world at the moment. In the first three quarters of 2016,

they grew by 94% compared to the same period a year earlier.

Egypt has been particularly active on the market in this first quarter, inviting tenders for large number of cargoes over multiple years. Facing growing domestic gas demand and gas output decline, the country has been forced to divert gas being sent to liquefaction plants for domestic use. Between 2013 and 2015, force majeure has been declared at Egypt's Idku plant. Exports collasped from approximately 50 shipments in 2013 to less than five 2015 and 9 in 2016, while they completely ceased at the Damietta plant. The country which had imported around 50 LNG cargoes by mid 2016, is now planning to import more than 100 cargoes (or 6,5 mt ; 9 bcm) in 2017. However, after hitting a floor in 2015-2016, the Egyptian gas production is expected to increase dramatically from 2020, when the Zohr field, discovered in 2015 and to be operated by Eni under a production gas sharing agreement, will come on line. Egyptian LNG imports should then start to settle down a bit by that time.

FSRU : boom in development

After a slow development pace in the second half of 2000s,  the FSRU technology seems to take off more recently and encounter success all over the world. Eight years after the first one has been put on line, the Excelsior FSRU from the company Excelerate, initially placed offshore Louisiana, there are 18 FSRUs in operation in the world and 6 committed projets. The bulk of them are built on purpose although the first ones were conversions of former LNG vessels.

An FSRU is a ship with onboard regasifiers as well as LNG tanks, with limited storage capacity.

The fad for this breakthrough technology is bound to its flexibility and to its easiness to set up. Often moored to a buoy offshore, FSRUs avoid permitting timeframe or setbacks. Although mainly particularly fitted to meet limited gas requirements for small isolated areas gas (such as islands), they might represent, when adding up the volumes they can all deliver, quite an important quantity of LNG.

The cornerstone of this development all over the world is the new strategy of Oil and Gas majors. Abundant LNG combined with mature markets in Western countries incites them to take stakes in downstream investment projects to generate extra LNG demand and create a home for the coming LNG surplus. FSRUs belong to those kind of investments. Total made for example 3 recent FSRU announcements: in Ivory Coast and Pakistan.

The counterpart to these investments is the signature of small volume and medium term contracts from 0,5 to 3 MMt/year in the countries of location.

A number of new markets are expected to be opened up by the use of FSRUs over the coming years such as Morocco, Ivory Coast, Namibia, South Africa. Malta will become the first new LNG importer of 2017 with its new floating storage unit which started commercial operations in January.

The FSRU business is currently dominated by three majors players: Excelerate Energy, Hoegh LNG, and Golar LNG.

LNG Deals in 2016

In 2016, LNG buyers signed contracts under some of the most favorable terms seen in the last ten years. First, gas prices conditions have shifted. LNG sold under contracts indexed to gas price reference soared, displacing classical oil-indexed contracts. Newly contracted volumes reached 30 mtpa, an increase by 50% over the previous year.

Article présenté sur la lettre d'information : Avril 2017

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