Against a background of Northeast Asian LNG prices remaining stuck firmly in the 5–6 $/mmbtu range, as they have been since the end of February, some big developments were seen in the global gas market.
Following on from last month’s diplomatic isolation by a number of other Arab states, led by Saudi Arabia and the UAE, Qatar announced a target to increase its LNG exports to 100 Mtpa within the next 5-7 years, which is a 23 Mtpa increase on current capacity. In line with that target, Qatar also announced that it would increase its gas production by 4 bcf/d. Given that Qatar had just emerged from a 12-year moratorium on development of the giant North Field, these developments are best seen as the country flexing its LNG muscles.
There are questions over the economic rationale of these plans, but there is little doubt over Qatar’s ability to deliver. We expect half of the target capacity additions, up to 12 Mtpa by around 2021, to come from debottlenecking existing trains. New trains will be needed to deliver the rest, but we would only expect to see these come online later, with 2025 a reachable but ambitious date.
The outstanding questions relate to whether Qatar and prospective partners will go ahead without long-term offtake agreements, thus taking on merchant risk. In the current market environment, Qatar is not likely to find long-term buyers for 25 Mtpa of liquefaction capacity, and the country seems to recognise this, as it announced a somewhat rushed venture with FSRU builder Hoegh to find new markets for its gas. But, taking all that merchant risk means that other LNG projects, such as in Western Canada or East Africa (or even the southern US) will face an even more difficult environment to place supply.
Even if Qatar (and other willing sellers) find buyers, terms will be difficult with buyers everywhere demanding highly flexible and low-priced LNG. Earlier this month Japan's Fair Trade Commission (FTC) went so far as to make it illegal for new long-term LNG contracts signed with Japanese buyers to have destination restrictions, which stop buyers from reselling excess gas. Such limitations are already illegal in Europe, so we think their time is up in the LNG market. Pricing will also be a problem, with reports that Indian buyers are looking to renegotiate price levels for US LNG exports—with indications that US sellers are not entertaining such requests.
Still, it was not all gloom. Pakistan certainly quickened pulses with its claim that it could buy 30 Mtpa within five years, and we took a closer look at this in our Insight: Pakistan revisited – room for more?, 21 July 2017. While Pakistan is likely to remain a good market for LNG, for it to quadruple its LNG intake in five years would require more than the market really has a right to expect—even in an emerging market now being largely driven by the Chinese economic growth machine. Still, we anticipate it can absorb an incremental 2 Mtpa or so for each of the next three years.
Our balances and our forecasts only saw a few changes this month, with most of the developments affecting the market over the longer term. Our Q3 17 Northeast Asian price forecasts remain averaging around 5.5 $/mmbtu, while we have 2018 global prices lower y/y at around 4.4 $/mmbtu. We remain bearish as we still expect the US arbs will need to close to Asia and narrow with Europe as a raft of trains open up in Q1 18.