In the past decade, the North America LNG market has been subject to significant periods of volatility, and the past year is a prime example. U.S. LNG developers recognize that the market is now “tapping the brakes” from one year ago when it comes to the export market, but they still remain optimistic about the potential for additional LNG projects to secure long-term buyers and agreements.
“By its very nature, the LNG marketplace will always be subject to geopolitics as well as regional economics,” said Deepa Poduval, Principal Consultant with Black & Veatch’s management consultingbusiness. “Investments decisions today must be made with a long-term perspective and an eye beyond the next year.”
As recently as a year ago, the opportunity to earn long-term, attractive returns from the sale of low-cost domestic natural gas resources to international markets attracted LNG developers and investors alike. Rising demand in the Asia Pacific region, including Japan and China, led many international LNG customers to seek to lock in natural gas contracts, given upward pricing momentum through June 2014.
However, LNG prices are indexed to oil prices in many markets, and oil prices retreated below $75 a barrel – and then $50 and $30 a barrel. At the same time, China’s economy slowed and Japan moved ahead with plans to restart nuclear power facilities. These factors meant the arbitrage opportunity for North American suppliers began to wane.
These concerns are reflected in the 2015 Black & Veatch Strategic Directions: U.S. Natural Gas Industryreport. In contrast to the previous year’s survey, where regulatory approvals for license applications were perceived as the largest impediment to exports by a wide margin, survey respondents now say they are increasingly concerned about the effects of geopolitics, competition and low market demand.
Despite these challenges, some level of optimism prevails. In the U.S., utilities that have historically seen LNG as a competing source of demand are today more comfortable about the level of U.S. natural gas resources.
Geopolitical Relationships between Russia, China
One of the most interesting geopolitical issues is the relationship between Russia and China. Until recently, China was seen as a significant potential source of demand for U.S. LNG supplies. While those estimates remain, China has sought supply from elsewhere, including Australia and Russia. Russia and China have entered into a number of transactions as Russia strives to serve growing demand in China and decrease its dependence on the European Union.
This relationship and its potential effect on U.S. markets creates an interesting dynamic for U.S. LNG, Poduval said. Stateside, U.S. LNG developers are entering into a phase of the market where excess supply is affecting near- and mid-term planning.
“Those already in queue to enter the LNG market may opt to slow or halt activity until the global market begins to show signs of recovery from a demand perspective,” Poduval said.
She said LNG developers recognize that there is a market slowdown which makes it more challenging to be successful now than it was two or three years ago.
“There will, however, be opportunistic projects that will go forward.”
Published originally on Black & Veatch Solutions.
