Amidst the rapidly evolving global energy transition, the LNG sector is balancing the competing forces of large scale capital investment and shifting expectations from customers.
A new Deloitte paper ‘Patterns and predictions: the evolution of a liquid LNG market’, launched at the APPEA 2019 conference and exhibition in Brisbane, Australia, poses the question: will the LNG market evolve in the same way as crude oil, or will it take a different path?
Bernadette Cullinane, Deloitte Australia National Oil, Gas & Chemicals Leader, and Deloitte Global LNG Leader, said: “Huge, long-term infrastructure investment is a hallmark of the sector, and balancing this against rapidly changing commercial and contracting trends is an ongoing challenge.
“Average contract durations shortened from 20 years in 2008 to as low as seven years in 20171. However, buyer appetite for long-term contracts appears to be returning, with average contract durations lengthening to 13 years more recently, consistent with anticipated LNG supply shortfalls ahead.
“Market participants have also diversified, and new digital platforms have emerged. These trends have amplified the complexity of LNG trade which is de-linking from its crude oil heritage and displaying the hallmarks of becoming a global commodity in its own right.
“There is growing consensus that the global LNG market is becoming more liquid, but it is unclear how this transition will unfold.”
The evolution of the oil market in the 1970s and 1980s provides an interesting historical proxy for LNG, but what path will LNG ultimately take?
To answer this critical question, the Deloitte report explores three distinct stages of market evolution:
Where have we come from?
This looks to the past and other markets to uncover the patterns and signposts in the development of global, liquid energy commodities.
Where are we now?
This focuses on the status of the LNG market today and current trends.
Where are we going?
This predicts what’s in store for LNG as it matures to become globally traded commodity.
Cullinane said that a comparison of the evolutionary milestones of the Brent and WTI markets to the LNG sector indicates that LNG has entered the early stages of commoditisation.
“Last year, the secondary market for LNG grew to approximately 10.5% of physical production2. By 2025 we expect the LNG secondary market will have grown exponentially, likely reaching parity with the physical market3,” she said.
“By 2030, if the LNG market behaves similarly to Brent and WTI, we forecast that the volume transacted on the secondary market will be greater than five times the size of the physical market4.
“The secondary market and new ways of trading LNG will become mechanisms for price discovery, and LNG pricing will become more transparent.”
The paper looks at the next expected stages of market evolution, including:
- Diversification: new business models will emerge that enable developers to diversify and reduce risk.
- Differentiation: risk management capabilities and commercial services will become key differentiators for companies.
- Pricing basis: new price indices will emerge as the de-linking from crude oil pricing evolves.
- Portfolios: portfolio players, trading houses and other institutions will provide services to help LNG players manage volume requirements and exposure to commodity price swings.
- Breaking bulk: the rapid growth of small scale LNG will enable access to a broader range of end-uses and markets, including shipping, road transport and remote power generation.
- Platforms: new digital marketplace platforms that provide dynamic, real time trading capabilities and increased price transparency will become more common.
- Unlocking value: commercial optimisation will become a source of competitive advantage, enabling LNG players to unlock increased value.
Cullinane said the historical patterns of crude oil commoditisation are a relevant lens to apply to LNG to help predict what the future for the sector might hold.
“The world’s energy transition to a lower-carbon future will drive LNG demand. This transition will provide compelling long-term demand signals to support continued market evolution,” she said.
- Shell – LNG Outlook 2019
- Shell - LNG Outlook 2019 and Deloitte analysis
- Deloitte analysis
- Deloitte analysis
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/28052019/the-evolution-of-a-liquid-lng-market/