Outlook for Gas Marketeneken.ieej.or.jp/data/6890.pdf · In China, gas demand has maintained an uptrend while decelerating on an economic slump. Indian gas demand has bottomed out

Outlook for Gas Market

The Institute of Energy Economics, Japan

Yoshikazu Kobayashi

Senior Economist, Manager, Gas Group,

Fossil Fuels & Electric Power Industry Unit

423rd Forum on Research Works on July 26, 2016

IEEJ：August 2016 © IEEJ2016

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Key points of this report

1

Oversupply in the international LNG market will expand further in the coming

years.

Upstream industry is cutting capital spending. A major matter of concern is that

the investment slump could lead the supply-demand balance to tighten over a

long term. It will be important to smoothly launch new LNG projects in Canada,

Eastern Africa and other regions.

LNG has begun to be exported from the lower 48 of the U.S.. While no explicit

impact has been seen in the Asian market yet, expectations are placed on the

improvement of liquidity and the creation of pricing benchmarks in the Asian

market.

The improvement of trading flexibility is a major precondition for developing an

LNG trading hub in Asia. A flexible, liquid market will contribute to the sound

development of the natural gas market and the improvement of supply security.


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Trends of major natural gas prices

European and Asian natural gas prices are going in the direction of convergence.

The Asian premium has almost diminished.

The U.S. market price trend has been independent from European and Asian trends.

2 Source: Prepared from various data

Natural gas import price trends in major countries

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$/mmbtu

Japan

UK

Germany

US

NE Asia spot LNG


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Global natural gas demand

Global natural gas demand has continued growing at a slower pace than expected.

Natural gas still has great supply potential.

Due to overall energy demand deceleration following an economic slowdown in emerging countries,

slack natural gas demand amid growing coal and renewable energy power generation, high gas prices

indexed to oil prices and other demand-side factors, however, the gas market has failed to expand as

earlier expected.

3

Global natural gas demand changes

(year on year)

Source: IEA

2011 demand outlook for 2015 and

actual data

Source: BP

-150

-100

-50

0

50

100

150

200

250

2007 2009 2011 2013 2015

Bcm

Others

Latin America

Africa

Middle East

Other Asia

Japan

China

FSU

Europe

US

Total841 852 970

574 604 490

200 198 218

755 698 653

576 531 493

428 402 441

139112 124

172168 167

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

WEO2011 Golde Age of Gas Scenario

WEO2011 New Policy Scenario

実績

Bcm

Latin America

Africa

Middle East

non-OECDAsia

Non-OECDEurope

OECDAsia Oceania

OECD Europe

OECD Americas


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Gas demand in developed countries

European and U.S. natural gas demand trends differ from each other.

In the United States, a gas price plunge under the shale revolution has contributed much to expanding gas

consumption in the power generation sector.

In Europe, natural gas demand had continued falling mainly in the power generation sector due to an economic

slump, weather factors and competition from coal and renewable energy before recovering slightly in 2015.

Given the United Kingdom’s global gas market share (2.0%) and the period (at least two years) for its exit from the

EU, Brexit may have only limited impacts on the international gas market for the immediate future.

4

U.S. natural gas demand

Source: Eurostat

European natural gas demand

(19 EU members)

Source: EIA

0

100

200

300

400

500

600

700

800

2000 2002 2004 2006 2008 2010 2012 2014

Bcm

Transportation

Industry

Commercial

Residential

Powergeneration

0

50

100

150

200

250

300

350

400

2000 2003 2006 2009 2012 2015

Bcm

Total

Other

Commercial

Residential

Transportation

Industry

Powergeneration


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Gas demand in emerging countries

In China, gas demand has maintained an uptrend while decelerating on an economic slump.

Indian gas demand has bottomed out after a slump and is expected to increase in the future.

Major factors behind gas demand growth are a decline in international LNG prices and rising demand for gas for fertilizers.

The Chinese and Indian markets have great demand growth potential for the future.

According to the IEA, China and India will account for 47% of global gas demand growth (341 Bcm) in the next five years.

At present, demand in China and India is the only factor that can change the current LNG supply and demand trend.

5

Chinese natural gas demand changes

(year on year)

Source: BP

Indian natural gas demand changes

(year on year)

Source: BP

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bcm

-10

-8

-6

-4

-2

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bcm


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Global natural gas supply

While Russia and Europe have reduced gas supply, rising production in the United States, the Middle East and Asia has

driven global supply growth.

Production has increased in Iran and Qatar among Middle Eastern countries and in Australia among Asian-Oceanian countries.

Global natural gas trade has turned upward, though with LNG trade stagnating.

LNG’s share of natural gas trade has fallen to 32%.

6

Global natural gas supply changes

(year on year)

Source: BP

Global natural gas trade

Source: BP

-60

-40

-20

0

20

40

60

80

100

120

140

2011 2012 2013 2014 2015

BcmOthers

Latin AmericaAfrica

Middle EastOther Asia

China

Russia

Europe

US

Total

32%

0%

5%

10%

15%

20%

25%

30%

35%

0

200

400

600

800

1,000

1,200

1991 1996 2001 2006 2011

Bcm

Pipeline

LNG

LNG %


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Large LNG projects launching production

New projects with a total capacity of more than 30 million tons are expected to launch production in

2016.

Large projects will launch production in 2017 and 2018 mainly in the United States and Australia.

However, the current oversupply may prompt some projects to delay start-up.

7

New projects through 2018

Source: Media reports, company releases, etc.

Country ProjectCapacity

(mtpa)Partners Start up

Angola Angola LNG 5.2 Sonangol, Chevron, Total, Eni, BP 2016

Australia Gladstone LNG 3.9 Santos, Petronas, Total, Kogas 2016

Australia Gorgon T1 5.2 Chevron, Shell, Exxon Mobil 2016

Australia Australia Pacific LNG 4.5 Origin, ConocoPhillips, Sinopec 2016

United States Sabine Pass (T2) 4.5 Cheniere Energy 2016

Australia Gorgon (T2) 5.2 Chevron, Shell, Exxon Mobil 2016

Indonesia Sengkang LNG 2.0 Energy World Corporation 2016

Malaysia MLNG T9 3.6 Petronas 2016

Malaysia PFLNG SATU 1.2 Petronas, MISC 2017

Australia Wheatstone LNG 8.9 Chevron, Apache, KUFPEC 2017

Australia Gorgon (T3) 5.2 Chevron, Shell, Exxon Mobil 2017

United States Cove Point LNG 5.3 Dominion 2017

United States Sabine Pass (T3-T4) 9.0 Cheniere Energy 2017

Cameroon Cameroon FLNG 1.2 SNH, Perenco, Golar 2017

Russia Yamal LNG (T1-T3) 16.5 Novatek, Total 2017

Australia Prelude FLNG 3.6 Shell, Inpex, Kogas, CPC 2018

Australia Ichthys LNG (T1-T2) 8.9 Inpex, Total 2018

United States Freeport LNG (T1-T3) 13.2 Freeport, Macquarie 2018

United States Corpus Christi LNG (T1-T2) 9.0 Cheniere Energy 2018

United States Sabine Pass (T5) 4.5 Cheniere Energy 2018

United States Cameron LNG (T1) 4.0 Sempra Energy 2018


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U.S. natural gas supply

Production growth has slowed down but will recover toward 2017 again.

Weak Henry Hub prices have had no major impact on U.S. natural gas production.

In February 2016, LNG export from the U.S. mainland started. Through 2020, more than 60 million tons of

LNG without restrictions on destinations will be exported from the U.S. mainland.

The U.S. LNG export has exerted no explicit impact on the Asian market but is expected to improve future international

LNG market liquidity and help create pricing benchmarks.

Meanwhile, the current oversupply may be making it difficult for LNG facilities to operate at their full capacity.

8

EIA outlook for U.S. natural gas

production changes

Source: EIA

U.S. LNG projects

Source: EIA STEO

-1.5

2.1

-3.5 -2.1

51.2

37.6

11.7

20.5

(10)

0

10

20

30

40

50

60

2014 2015 2016 2017

Bcm

Production growth(GoM)

Production growth(non-GoM)


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Russian natural gas supply

Natural gas exports to Europe via pipelines had plunged in the wake of the Lehman

Shock before recovering recently.

Europe with expanding gas import demand will remain a major market for Russia. Given

competition from renewable energy, coal, and U.S. and other LNG, however, Russia

may be required to set competitive prices for natural gas exports.

9

Russian gas export volume changes

Source: IEA MTGMR

Future European gas supply-demand balance

Source: BP

0

20

40

60

80

100

120

140

160

180

2006 2008 2010 2012 2014

Bcm

Other

Turkey

Poland

Italy

Germany

France

Belgium

Austria

182

238256

269

0

100

200

300

400

500

600

2015 2017 2019 2021

Bcm

Demand

Supply

Net import


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Spot and short-term contract transaction

trends In the international LNG market, spot and short-term contract transactions have stagnated in response to

weak demand.

Trinidad and Tobago, Russia and Nigeria have remained major LNG suppliers for spot transactions.

As LNG production free from long-term contracts increases in the future, spot transactions are expected to expand due

to supply-side factors.

10

Global spot and short-term contract

transactions

Source: ICIS

Global spot cargo exports

Source: GIIGNL

Trinidad & Tobago, 63

Russia/Europe, 60

Nigeria, 56

Others, 42

Asia, 34

Middle East, 33

Total 332 cargoes

(2015 Actual)

28%

0%

5%

10%

15%

20%

25%

30%

35%

0

10

20

30

40

50

60

70

80

2000 2003 2006 2009 2012 2015

million tonsMiddle EastLatin AmericaNorth AmericaEurope

Other Asia

China

India

Taiwan

Korea

Japan

Spot/short-term %


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Slumping investment and future projects

Crude oil price plunges have led oil companies to continuously reduce capital spending.

Oil majors look for new business models, while small and medium-sized oil companies struggle to repay debt.

As uncertainties grow about LNG demand, investment decisions are expected to be delayed on new

projects.

A major matter of concern is that the investment slump could lead the supply-demand balance to tighten over a long term.

It will be important to timely launch projects under planning particularly in Canada and Eastern Africa.

11

International oil majors’ capital

spending trends

Source: IEEJ

LNG projects under planning (reference)

Planned amounts for 2016 include capital spending on the downstream

sector. *Including BG (British Gas) spending.

Sources: Annual reports of these companies

35

40.338.5

26.4

22.9

28.9

34

31.1

23

18.7

33

26.6

23.2

20.5

17

0

5

10

15

20

25

30

35

40

45

Shell* Chevron ExxonMobil Total BP

$ Bn2014 2015 2016

0

50

100

150

200

250

300

350

400

2015 2020 2025 2030

million tonnes

Other

Russia

Australia

SE Asia

Iran

East Africa

West Africa

Canada

US


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Outlook for international LNG supply-demand

balance Oversupply may expand further

Large projects will be launched one after another in the United States and Australia.

Some projects may be forced to delay production launches or adjust capacity utilization ratios.

Important factors for projecting future demand are the trend of the world economy including emerging

economies and energy policy measures such as the enhancement of price competitiveness against other

fuels and infrastructure development.

Europe will increase LNG demand as the final receiver of surplus LNG for supply-side reasons.

12

Source: IEEJ

Short-term global LNG

demand and projected

supply capacity 245262 268

288282

336

0

50

100

150

200

250

300

350

400

Demand Capacity Demand Capacity Demand Capacity

2015 (actual) 2016 (forecast) 2017 (forecast)

million tonnes

Africa

Americas

US

FSU

Europe

Middle East

Asia Pacif ic


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Outlook for natural gas prices

13

Following is an outlook for the average price of LNG arriving in Japan from the second half of 2016 through 2017:

Details of outlook for prices

Overall LNG import prices are forecast to increase as prices for long-term LNG import contracts rise in response to a crude oil price recovery.

Given that orders from emerging LNG importers will increase while the LNG supply-demand balance will further loosen and that spot prices may be susceptible to changes in the benchmark European (NBP) price and long-term contracts prices, spot prices are forecast to weaken to a $4.5-5.5/mmbtu range.

As a result of the above forecast price changes, a gap between long-term contract and spot prices is likely to expand.

Price 1st half 2016

(Actual data)

2nd half 2016

(Forecast)

2017

(Forecast)

LNG arriving in

Japan $7.0 $6.6 $7.4


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Developing an LNG trading hub

Japan published the Strategy for LNG Market Development in May 2016, seeking to procure cheaper and

flexibly available LNG.

Top priority is given to relaxing or repealing destination clauses in LNG contracts. A flexible, thick market would

contribute to finding appropriate natural gas price levels and improving natural gas security.

Moves for developing a trading hub

The Tokyo Commodity Exchange opened an LNG OTC market at the Japan OTC Exchange in September 2014.

In January 2016, the Singapore Exchange launched futures and swaps on Singapore’s new price index for LNG (SGX

LNG Index Group: SLInG).

In the future, it will be important to invigorate spot transactions through the improvement of transaction

flexibility and benchmark prices’ reliability and the standardization of trading terms and conditions.

14

Specific actions under the Strategy for

LNG Market Development

Source：SGX

Singapore SLInG price changes

Source: Ministry of Economy, Trade and Industry

1. Relaxing or eliminating restrictions on resale (under destination

clauses) in contracts

2. Implementing public financing contributing to launching projects and

developing a market smoothly

3. Expanding gas/LNG demand to thicken the LNG market

4. Quick LNG delivery

5. Realizing a benchmark price reflecting Japanese LNG demand

6. Expanding LNG terminal, underground storage and pipeline capacity

available for third parties’ delivery and transactions

7. Enhancing collaboration between LNG consuming and producing

countries

8. Continuing dialogue with private sector players

9. Future reviews and continuous consideration


Contact :[email protected]

Outlook for Gas Marketeneken.ieej.or.jp/data/6890.pdf · In China, gas demand has maintained an uptrend while decelerating on an economic slump. Indian gas demand has bottomed out

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