The global natural gas trade has expanded rapidly, driven by the significant demand growth in Asian markets and ample natural gas resources in Qatar, Australia, the United States, and Russia.
The LNG trade, the only viable option to connect demand and supply for long-distance natural gas trade between continents, has experienced impressive growth over the past two decades, the US Energy Informational Administration (EIA) says in a report. For decades, LNG producers from the the GCC region have been serving European customers. However, the emergence of the US as the world’s top LNG exporter is set to change the direction of global LNG trade, traders and analysts say.
The US started shipping its first LNG cargo from the lower 48 states in 2016, and it has since risen to become the world’s top LNG exporter in just six years as a shale gas revolution boosted domestic production and turned the country into a powerful force in global energy markets, the EIA report says.
Traders and analysts are predicting that the US is set to emerge as the biggest exporter in the world through 2022 as a whole.
European LNG demand is likely to remain strong due to uncertainties about natural gas supplies from Russia. US producers have responded by boosting LNG shipments to Europe, where prices are now higher than in East Asia. Prices in both regions far exceed those in the United States, suggesting that US LNG exports will continue to increase throughout the rest of the year.
Middle Eastern producers Oman and the UAE may also have scope to adjust their role in the global LNG market going forward, with most of their contracts set to expire in the next few years and with both planning capacity expansions, Argus Media says in a report.
According to the report, GCC LNG exporters, particularly Qatar, are going to face stiff competition from the US, which has recently risen to the rank of the world’s top LNG producer. GCC LNG producers have a location advantages as they are closer to Asian markets, which still account for around three quarters of global LNG demand, and have been widely expected to account for the bulk of demand growth over the coming decades.
“The commercial strategies that Qatar adopts in marketing the additional supplies that it is gearing up to produce will be a key factor in how the LNG market develops in the coming year,” the Argus Media report says.
Burgeoning Asian demand
According to a report by International Energy Agency, the market structure and trends for the Asian liquefied natural gas (LNG) market have evolved dramatically since the fuel was introduced in the late 1960s. While traditional markets such as Japan or Korea have held their position as the largest consumers in the region, their domestic markets have changed under the influence of liberalisation policies, which have led to different stages of market opening.
In parallel, the emergence of fast-growing LNG importers such as the People’s Republic of China and India has led to substantial market growth, which has coincided with more diversification on the supply side, thus resulting in shorter and more flexible LNG contracts.
“Such an evolution in the contractual structure has had implications for price formation towards more diversity in indexation and more cross-influences between regional markets,” the IEA report says.
The vast majority of Omani volumes are also tied to long-term contracts with Asian buyers. Spanish firm Naturgy’s 1.65mn tonnes per year contract – which it took over last year from Union Fenosa Gas, its joint-venture with Italian firm Eni – is technically aimed at the Spanish market but has destination flexibility, which allowed the whole contractual volume to be diverted to Asian markets in recent years. Spain received its first Omani cargo in seven years in January.
But portfolio players such as BP have recently secured some offtake from Oman. Debottlenecking at the country’s 10.4mn tonnes per year (t/yr) Qalhat export facility boosted Oman’s production capacity by 1.5mn tonnes per year. And more Omani supply could become available later in the decade, with all the country’s long-term contracts set to expire in 2024-26.
By contrast, ADNOC LNG may have more volumes to market in the short term. The company, which operates the 5.6mn t/yr Das Island export terminal, signed a spate of short-term contracts with several customers once its long-standing 4.3mn t/yr contract with Japanese utility Jera, originally signed in 1977 by Tepco, which merged with fellow Japanese utility Chubu Electric to form Jera in 2015, came to an end in March 2019.
Most of these contracts were set to expire this year, with only 1.8mn t/yr of post-2022 volumes committed to trading firm Vitol. ADNOC recently announced its plans to build a 9.6mn t/yr liquefaction facility in Fujairah on the UAE’s east coast.
But the project is in its early stages, with the firm having issued a tender for construction services only in late February. ADNOC has also announced plans to lift export capacity to 12mn t/yr as part of its New Energies Strategy, underpinned in part by gas developments slated to produce 3 billion cubic feet per day.
The production ramp-up in Qatar, Oman and the UAE could bolster the Middle East’s role in the global market, particularly as other potential swing suppliers have stumbled.
The emergence of Mozambique as a large LNG exporter appears more uncertain, with the timeline of TotalEnergies’ much-touted 13.1mn t/yr Mozambique project thwarted by delays caused by security issues in the country.
The firm had targeted to start exports in 2024, but works halted following militant group attacks in 2020 and have yet to resume. The 15.2mn t/yr Rovuma LNG project is not expected to reach a final investment decision before 2024.
Russian role
The future of Russia’s planned Arctic LNG- 2 project is also in doubt. The large-scale facility may be delayed by sanctions blocking involvement in the project following the Russia- Ukraine conflict. Even if the project continues as planned, sanctions may dampen its ability to add to the supply pool. With Russia’s stake in the European energy mix set to come to an abrupt end, Europe will need to look elsewhere for gas supply. Middle East producers could seize the opportunity to forge a new strategic partnership, or open up to new opportunities in a dynamic global market, the IEA report says.
Unique position of Qatar
Qatar is looking eastward, since its location halfway between Europe and Asia previously allowed it to play a role as a swing supplier, banking on the flexible supply contracts that it holds mainly with European buyers. Historically, Europe played the role of “sink market”, absorbing cargoes when there was no more profitable destination, but never really made LNG a staple of its supply mix.
But the swift rise of the US as the world’s largest LNG supplier, coupled with an uncertain demand outlook in Europe as the continent steps up its net zero ambitions, has likely switched Qatar’s focus towards more sound demand prospects in Asia. In recent years, the country has signed a raft of long-term supply contracts with Asian firms.
Many of these came into force at the start of 2022 and because their combined volume exceeded that of the older deals that expired at the end of last year, Qatar has been left with fewer cargoes to sell on a spot basis or under flexible contracts. At the turn of the year, Europe was already well into a difficult winter, grappling with low underground storage levels on the back of slow Russian pipeline flows and global competition to secure supply.
GCC role
According to a report by the International Gas Union (IGU), the third-largest trade flow of LNG is from the Middle East to Asia Pacific, mainly driven by higher exports from Qatar to east Asian countries such as China, Japan, and Korea. In 2021, GCC countries exported around 37.1 million tonnes of LNG to Asia-Pacific countries, mostly driven by volumes from Qatar and the UAE.
The report also predicts that the growing competition between Asia and Europe as LNG demand centres is likely to boost LNG trade voyages in line with the growth in liquefaction capacity. It also highlights the fact that as Europe continues to struggle to implement the policy to replace Russian gas following the Russia-Ukraine conflict, more attention has been placed on the US LNG to fill the void.
Driven by strong economic growth momentum in Asian countries such as India, China, Korea, and Japan, the Asia-Pacific region remains the world’s leading LNG importer, providing a readily available market for GCC LNG cargo. The IGU report also predicts that demand for LNG in the Asia-Pacific is likely to grow further, and will be able to absorb any additional capacity that comes online as a result of the investments made by the UAE and Qatar to boost production. This means that the direction of LNG trade has been reversed towards Asia for the near future.
This article originally appeared in Refining & Petrochemicals Middle East.
