LNG Markets in Transition: The Great Reconfiguration

About the Project:

The paper will analyze the challenges posed by the present business environment to the LNG industry as of 2016 and explore potential ways forward in terms of pricing and long-term contracts. Substantial amounts of LNG supply will reach the market by 2020 that may well exceed Asia’s appetite for LNG, which had relied mostly on increasing demand from China, India and Southeast Asia, presenting uncertainties in terms of growth due to price sensitivity. The flexibility of some new supplies, notably from the United States, means that many companies may be left with large amounts of surplus LNG. In this context, Europe is widely seen as the residual market where additional volume could be sold but its absorption capacity is likely to be tested by resistance from pipeline suppliers, especially Russia. Could this trigger another shift in LNG business with sellers of either existing supplies having to renegotiate or new projects moving ahead without the support of long-term contracts?

Key Points:

• Spot and short-term LNG trade are expected to continue rising, potentially reaching 45 percent of global LNG trade by 2020. Increased supply side flexibility is already embedded in higher volumes of uncommitted LNG, portfolio LNG, and US LNG that is not destination bound.
• Looking at the next five years, many factors point to a change in the way the LNG market operates. Individually, these factors would not trigger massive changes, but together, they could create a great reconfiguration of the LNG business.
• The growth of short-term trade is important because it will determine the future relevance of spot-indexed prices and buyer’s need for long-term contractual LNG volumes.
• A change in the nature of buyers from government monopoly or utilities in OECD countries to include smaller players, independent power producers and traders seeking to profit from arbitrage opportunities. Meanwhile, established incumbents had to change their business models, as their market share was no longer guaranteed and stable markets saw greater volatility in gas demand.