“The world is becoming liquid” is probably the sentence we should remember from the 24th International Gas and Power Summit, referring to the sharp increase in Liquified Natural Gas (LNG) trade. Integrated, more competitive and flexible markets are the main features of this development.
In 2018, global demand for LNG rose by 8,6% demonstrating a shift towards a more flexible technology than traditional gas pipelines. Indeed, with a mode of transportation more easily adaptable to demand, LNG has seduced many countries.
A change in the landscape among LNG demanders
Traditionally, the primary market of LNG was Asia, with India and Japan as major demanders. China is also a key actor, characterized by a strong residential and industrial demand : the country has imported 47,2 million tons of LNG in 2019 – a figure that is slightly decreasing compared to last year , notably due to a warmer weather and a development in domestic gas production in China. Furthermore, the country is expected to account for 40% of the growth in gas demand in 2040 according to the IEA, opening promising prospects for LNG future.
Newcomers on the Asian LNG market include Pakistan, Bangladesh and Vietnam, and have beaten all expectations. In the view of upcoming demographic challenges, these countries seek to ensure energy security by extending their power generation sources.
The same phenomenon is happening on the African continent: Ivory Coast, Ghana, Senegal notably think about importing LNG in order to change their electricity mix and enlarge its access, as in Sub-Saharan Africa, 6 out of 10 people are still deprived from it. For those countries, LNG represents a more relevant option than the only Trans-Saharan pipeline, which is currently the main circuit for gas supply.
Australia, the United states, and Middle East – particularly Qatar -, are and remain essential suppliers. Qatar has recently triggered a new wave of Final Investment Decisions (FID) in the LNG sector, keeping its spot of export leader along with the United States, which recent increase in exported volumes came from the shale revolution. Last but not least, Indonesia, with its offshore gas resources, was a gas exporting country in the past. It is suffering from decline in the recent years, but the infrastructure for LNG production already exists, opening good perspectives for LNG.
However, experts at the forum have argued that while LNG supply has grown by almost four times in the 2000’s, it was not accompanied by a symmetrical increase on the demand side. This steady growth of the LNG exports not correlated to demand, led to a downwards price pressure. The role of storage is therefore key for balancing this difference, but they have noted that in Europe, storage sites are already full…
New LNG trends: innovation, indexation, short-term contracts
The first important trend is the “commoditization” of LNG market, meaning LNG is gradually becoming a commodity widely traded on the market. The drivers that can be identified are the technological innovations, notably the expansion of storage and regasification units, lowering the cost for entering LNG market. For instance, the company Technip Energies has fostered innovation with its new projects of modularization (onshore trains), mid-scale plants of LNG, and floating containers (F-LNG) which it seeks to further develop.
Another important fact is that we are moving towards short term contracts (5-10 years), responding to a demand of flexibility from both suppliers and buyers. The expiry of legacy contracts will tend to be replaced by smaller and more adjustable deals, opening more trade opportunities for LNG. Indeed, one of the concerns with long term contracts was the obligation of the supplier to export towards a specific destination, which will not be the case with these new deals.
In parallel, an intensification of competition is taking place because of an increase of suppliers, and leads to a decrease in prices for the buyers. On the other side, this oversupply leads to an increase in prices on the spot market, which is promising, since spot and short term sales represent around 30% of the total market in 2018. Experts explain that the anticipation of the oversupply in LNG markets leads to the increase of price on spot markets. Furthermore, LNG contributes to energy security, since it advertises a pricing model which is not exclusively based on oil benchmarks, and represents a force to renegotiate contracts.
LNG’s geopolitical advantage for Europe
Although Europe is qualified of market of “last resort”, – representing a share of 15% of global LNG – we can still note that 49 million tons were supplied to Europe in 2018. Even though it is less than natural gas, experts predict that Europe is going to increase its imports in the upcoming years, due to an a growing demand for gas in the power generation sector.
For Europe, LNG is a way to diversify its supply and become less dependent on Russian pipelines – that currently account for around 40% of natural gas supply. The EU is prepared in case of disruption of gas supply, with a high storage capacity. But the dilemma between Russian pipelines gas and United States’ LNG remains vivid: experts note that Russia is both a supplier of LNG and natural gas.
Indeed, the new project Arctic LNG 2 is capitalizing on the success of the first LNG Yamal line built in 2017. It is expected to be operational in three years, in line with President Putin’s objective to increase transported volume of LNG in the Northern Sea route from 20 million to 80 million tons in 2024. This implied for the company Novatek to build new transshipment terminals in Kamtchatka and Murmansk (Russia), eventually leading to an increasing influence on the Asian market.
The remaining challenges for LNG’s future
More generally, gas in power generation enables to move away from less polluting sources of energy such as coal, or fuel oil. It represents a promising potential but the problem is affordability. Therefore, the main question becomes: how to ensure affordability while seeking to lower carbon emissions through shifting to gas? The speakers argue that there is a strong need for policy support, because for some countries, shifting entirely to gas is not relevant in the view of their demand structure.
Although LNG becomes a more resilient and dynamic trade system, it faces several problems : its transport costs are higher than for natural gas, and the liquefaction process represents an additional burden reflected in final prices. Shipping efficiency and liquefaction/regasification technologies has thus to be improved in order to decrease this cost.
A crucial challenge for LNG includes the immature state of the LNG paper market, whereas for oil it is developed. Indeed, buyers tend to diversify their portfolios, and therefore move towards a new way of indexation of LNG prices. But creating a hub for LNG is a long process : while it is still missing a single price index, it is seeking stable price benchmarks – such as the Henry Hub in the United States. In Asia, the price of LNG is linked to crude oil on the spot market, whereas in Europe it is dependent on the price of the competing resource – natural gas.
At the horizon of 2024, the IEA predicts a trend of convergence in regional prices. But this LNG growth is tightly linked to globalization: whereas natural gas trade is more adapted to a regional market because of the pipelines constraints, LNG is by essence global – impeding exclusively regional prices. Finally, the move towards a single price index would only benefit the LNG markets, as it would imply more confidence, encouraging more investment into terminals and infrastructure.
 « Global Gas and LNG Outlook for 2035 », McKinsey report, September 2019 https://www.mckinsey.com/industries/oil-and-gas/our-insights/global-gas-and-lng-outlook-to-2035
 « China LNG imports slide 1st time in 3 years on outage stocks », Stephen Stapczynski, Bloomberg, 1 november 2019
 IEA (2019), « Gas 2019 », IEA, Paris https://www.iea.org/reports/market-report-series-gas-2019
 « Liquified Natural Gas : a growing opportunity for emerging markets », James Woods, DRIEHAUS, February 2018 https://www.driehaus.com/perspectives/liquefied-natural-gas-a-growing-opportunity-in-emerging-markets
 « LNG in Europe, current trends, the European LNG landscape and country focus », Nina Howell, 16 September 2019. BRACEWELL.
 « What is the future of LNG pricing ? » Simon Collier, 20 august 2019. DLA PIPER. https://www.dlapiper.com/en/qatar/insights/publications/2019/08/energy-infrastructure-and-projects-global-insight-issue-2/what-is-the-future-of-lng-pricing/