It is high time that alternative pricing mechanisms are devised to reflect the LNG supply-demand balance rather than being indexed to proxies like Brent Crude or JCC. However, no such reliable measure has yet been developed. Rising project costs in the Asia-Pacific region, robust demand from emerging economies along with Japan and South Korea, and tight supply conditions are some of the reasons for firm LNG prices.
At the same time, Henry Hub has trod a downward curve over the past five years, reaching a 10-year low in 2012. In tandem, LNG prices in the US are expected to remain much lower than the delivered prices at present in Asian countries. Moreover, the new brownfield LNG production facilities are selling LNG indexed with Henry Hub, which has been attracting Asian buyers in flocks. The opening of the widened Panama Canal is another important factor driving Asian buyers to North American sources.
In the Pacific Basin, the rising cost of production in Australia could result in delays in commissioning planned projects. To add to the supply concerns, Indonesia and Malaysia are now developing regasification terminals to meet their domestic demand. Egypt is planning to import gas from Algeria to meet LNG export obligations. While environmental concerns call for enhanced gas use by all economies, these developments on the supply front threaten to cause a permanent upward shift in LNG prices.
Traditionally viewed as a cheap source of clean energy, will such a development threaten a large-scale substitution by coal, or will emerging economies go slow on adopting gas as a major source of energy? Or will Japan, facing stiff opposition to nuclear power generation from its own people, import more coal so as to save on costs?
These are questions that cannot be answered definitively in the current scenario. It is certain that LNG prices will remain firm, but the recent regional dichotomy in LNG prices will provide opportunities for arbitrage trading. Naturally, re-exports to make the most of the prevailing price differential are gathering pace. Many importers now prefer regasification sites with re-export facility.
Another area of interest for LNG players could be LNG bunkering, which is gaining importance gradually. More stringent air emission requirements for seagoing vessels are posing a new set of challenges for ship operators.
Seasonal variations in demand, evolving bunkering requirements, peak gas demand and exploitation of marginalised and scattered gas fields are some of the important reasons why many players are now thinking of developing small and mid-scale LNG terminals. Advances in process technology, standardised designs, manufacturing efficiencies in liquefaction, transport and regasification are all reducing the costs of small and mid-scale LNG plants and making their development more economical for gas delivery in small and remotely located areas lacking infrastructure. Drewry expects a gradual increase in the numbers of small and medium-scale LNG plants and terminals in the medium to long-term.
As for the freight market, the short-term rate assessments for conventional LNG carriers have been incredibly positive. Since the last market low in 2Q10 the rates have almost quadrupled with only a slight softening in 2Q12. It is expected that winter demand could provide the momentum needed for the rates to continue their climb. However, with only 4.5 million tpa of liquefaction capacity expected to come online in 2013, and 25 vessels scheduled to be added to the current fleet, it appears that the scenario of tight tonnage supply might not last long. Rates might face downward pressure soon if supply concerns and rising LNG prices are not addressed.
However, in the long run, based on liquefaction capacity addition plans, a lot more vessels are needed than are provided by the current order book. New ordering will continue, provided finances are available.
Written by Simon Raper, Drewry Maritime Research.
The ‘LNG Shipping Market Review and Forecast 2012/13’ is available from the Drewry website: www.drewry.co.uk
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/03012013/lng_shipping_market_review_drewry_163/