Editor’s Note: This column is part of a regular series by industry veteran Brad Hitch for NGI’s LNG Insight dedicated to addressing the complexities of the global natural gas market.
After several years of chronically tight LNG markets, there was optimism among LNG buyers at the start of 2011. It seemed like the tables were turning in the favor of downstream buyers that had invested heavily in import infrastructure only to see terminals underutilized.
The biggest fundamental driver in the seemingly imminent rebalancing was the large amount of new liquefied natural gas coming from Qatar. The LNG market had absorbed a great deal of new Qatari production in 2009 and 2010 – over 37 billion cubic meters (Bcm) more in 2010 than in 2008 – but it was also staring down the barrel of another 23 Bcm/year by 2012.
The amount of new annual LNG production that Qatar brought on with its six mega-train expansion was over 27% of what the entire world had been producing when it commissioned the first of its new plants in 2007. On the demand side, the largest Asian markets had only just recovered to 2008 levels in the wake of the global financial crisis.
The buyer’s market of the early 2010s never materialized, of course. The earthquake and tsunami that hit Japan in March of 2011 caused an eventual shutdown of Japan’s entire nuclear power capacity and reversed the fortunes of the market overnight. Over the next two years, Japanese LNG imports increased by more than the incremental 23 Bcm that Qatar was producing.
Impact Of The First Expansion
Japanese buyers had hoped to leverage the looser market to create some structural changes to the way that the industry contracted. The plan was to push for more flexibility in contracting terms and to start directly integrating spot trades as a part of the business model.
The changes being sought flew in the face of the way business had historically been since the early years of LNG, and were not readily accepted by the producers. Realistically, given how few supply options there were in the early 2010s, any real change to contracting strategies would have needed to be agreeable to decision makers within QatarEnergy and the country’s energy ministry.
Qatar, for its part, had always expected to sell some of its plentiful new LNG volumes into the spot market and then commit more volume to long-term sales when the timing was right. This was an explicit part of its strategy, and was the underlying logic for taking import terminal capacity in Europe and the United States.
The Qatari decision makers were always careful, however, not to allow the marketing of spot volumes to undermine its long-term contract prospects. The intention was to prevent competition with its own production that might come through the sale of discounted spot cargoes into historical long-term markets like Japan and South Korea.
Investment in shipping capacity meant that Qatari volumes could be placed across the globe. The economics associated with condensate production and enormous economies of scale meant this could be done patiently, without the need to optimize the short-term price.
Leveraging flexibility in this way effectively bifurcated the spot market between the traditional Asian buyers and new markets in the Atlantic. Qatari LNG made its way to Europe even though European gas prices were generally lower than the prices Asian buyers were paying for spot cargoes.
This approach preserved the need for heavy contractual commitments from buyers seeking supply security and kept the burgeoning spot market from becoming a viable alternative. It also served to lower barriers to entry from other suppliers.
Projects that would not have been competitive due to cost reached a final investment decision (FID) in the wake of the first mega-train expansion as the Japanese nuclear shutdown and then rapid Chinese market growth caused prices to stay elevated.
Qatar has yet another massive expansion coming online before the end of the decade in the form of two separate projects, North Field East (NFE) and North Field South (NFS).
NFE will add 32 million tons (Mt) annually by 2025 via train-level joint ventures with TotalEnergies SE, Shell plc, ExxonMobil, Eni SpA and ConocoPhillips. NFS is slated to add an incremental 16 Mt/year by 2028 with TotalEnergies, Shell and ConocoPhillips as partners.
The overall growth in capacity is similar to the earlier expansion - 49 Mt/year this decade vs 47 Mt/year in the late 2000s. As with the earlier expansion, the NFE and NFS projects will be accompanied by a massive increase in shipping capacity. In September, QatarEnergy announced it had placed an order for 17 newbuild LNG carriers in addition to 54 carriers ordered in 2021.
On its own, the North Field expansion presents less risk of creating an oversupply than the earlier mega-train expansions. The capacity increase is slightly larger, but the market has more than doubled in size since the first two mega-trains were commissioned in 2009.
This time, however, Qatari expansion looks to be closer to one-third of new liquefaction capacity during this period, whereas it had been two-thirds in the late 2000s and early 2010s. The United States is currently slated to add over 75 Mt of annual liquefaction capacity through the remainder of the decade, and there are projects under construction in other parts of the world.
Much like the Fukushima disaster twelve years ago, the war in Ukraine has created demand for LNG that was unanticipated at the time of the new trains’ FIDs.
In the aftermath of the war we have once again seen high prices help to stimulate additional liquefaction FIDs, potentially pushing the U.S. liquefaction expansion by another 30 to 40 Mt annually this decade on top of the projects under construction.
New Era For The Market?
It is going to be very interesting to see how the market absorbs all of the new production and whether LNG marketing will need to change. The potential gas demand throughout the world is more than enough to offset the liquefaction capacity under construction, but there is less and less space for traditional contracts.
QatarEnergy is uniquely positioned to influence the way the world conducts its LNG business, and the approach it takes will be very important for the United States as its de facto primary competitor.
The biggest difference between the LNG market today versus 2009 is the role of the United States, not only its large export volumes but also its commercial terms. When Qatar embarked upon its earlier mega-train project there was no place where buyers could find free-on-board, destination-flexible volumes from a wholesale gas market on a “cost-plus” contract structure.
The long-term clearing price did not need to be thought about very much because new supplies were constrained by the need to develop gas reserves. With the United States as an exporter, the constraint on new LNG supply now comes from pipeline and liquefaction bottlenecks.
U.S. development has been driven by a midstream model that is heavily dependent on long-term contracting. Were the Qataris to take a competitive position that seeks to periodically slow that development, the approach might be to offer end users shorter duration contracts with more flexibility and domestic market indexation – contract terms that would be difficult to finance in the United States.
In other words, more spot market, not less, which would represent quite a seachange from 2011.
Brad Hitch has spent more than 23 years working in LNG and natural gas trading from London and Houston. He currently works as an adviser to new market entrants, and he has held senior trading and origination positions at Barclays, Cheniere Energy Inc., Enron Corp., Merrill Lynch and Williams.
