Global LNG market on verge of big things: IEA

The global gas industry is at a crossroads – facing upward and downward pressures on profits and supply with major importers showing signs of slowing and the oil price slump leaving firms unable to cover costs.

But according to the latest Medium Term Gas Market Report from the International Energy Agency, there is still optimism in the uncertain marketplace and diversifying export markets and cutting costs on downstream operations might just be the answer.

The IEA report has painted a challenging picture for gas producing economies off the back of the continued oil price slump, which has had a two-pronged impact on firms’ ability to fund operations.

While lower oil and gas prices will help re-accelerate global gas demand to an annual rate of about two per cent until 2020, supplying this demand may prove to be costly for the cash-strapped industry.

“The implications of such a steep and sudden oil price resetting go far beyond the oil market itself,” the IEA cautioned.

“Oil and gas companies are responding to the new market environment by cutting capital expenditure programs. Budgets for 2015 have already shrunk, but in the absence of a meaningful price recovery, deeper cuts will follow.”

“Amid squeezed cash flows, more costly, low-return projects will be cancelled. As a result, growth in global gas production is set to slow.”

“Those projects currently under construction today are set to come on stream broadly as planned, as large upfront capital costs have already been incurred. Beyond that, however, new LNG plants will struggle to get off the ground. Today LNG prices simply do not cover the capital costs of new plants.”

The IEA predicts the next 24 months will at least see some consolidation of the gas industry with the remaining operations determine supply for the coming decade.

However the report warned that if current low prices persist, LNG markets could “tighten up substantially” by 2020, the agency concluded.


Is Asia really the engine for growth?

While the lower oil price and the better affordability of gas imports is expected to provide some tailwinds for gas exporting nations in the short term, expanding further in the Asian region could become more difficult in the medium term.

“Although Asia has been regarded as an engine of future gas demand growth, the fuel has struggled to expand its share of the market in many parts of the region. This has raised questions over the viability of gas as an attractive strategic option across Asia,” the IEA report says.

“In Japan, gas demand is set to fall. The only uncertainty is how fast, due to the fact that the scale and timing of the nuclear power comeback remain unknown.”

The international agency noted that a number of Asian nations are deliberately limiting gas usage in their power mix and have prioritised coal capacity expansions over those of gas.

Wood Mackenzie’s Chris Graham remained optimistic about Asia’s long-term appetite for gas and even said new countries in the region had the ability to sustain demand for the commodity.

““The longer-term appetite for gas remains strong -– Asia is still the key region for LNG demand growth globally although the focus is shifting from the traditional markets of Japan and Korea to China, India and the SE Asian economies,” he says.

“That said Japan will remain the world’s single largest LNG importer over at least the next couple of decades, and a key partner for Australian LNG, although its future growth will be more modest.”

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