More evidence came this week that liquefied natural gas (LNG) markets are undergoing profound and permanent structural changes amid an ongoing global supply glut for the super-cooled fuel.
On Wednesday, China National Petroleum Corp. (CNPC) Chairman Wang Yilin said that his company is looking for opportunities to rework the pricing method on its LNG supply contract with Qatar. Bloomberg said that Wang didn’t specify if CNPC’s contract with Qatargas has any pricing review clauses. Qatargas, for its part, declined to comment.
Wang’s comments follow Petronet’s successful renegotiation of its long-term (25-year) LNG contract with Qatar’s RasGas in December. I wrote at the time that Petronet’s disclosure was “profound and typifies the radical shift that LNG markets are going through after the period of limited LNG supply and exorbitantly high prices (2011-2014) post the March 2011 Fukushima nuclear disaster.”
If Petronet’s disclosure was profound, Wang’s comments offer growing evidence thatLNG markets are in a state of change for which there will be no turning back. These changes come amid two important developments. First, the plunge in global oil prices of around 70% since June 2014. Since most LNG in the Asia-Pacific region is linked to the price of oil, the bloodbath in global oil markets have hit LNG hard. Spot LNG prices in Asia have plunged from just over $20 per million British thermal units (MMBtu) in February 2014, to around $4.50/MMBtu for cargoes to be delivered in April.
Of course the other major driver is the ever-increasing LNG supply glut. Global LNG output last year reached 250 mtpa and is projected to reach 330 mtpa by 2018, mostly from new projects coming on-stream in Australia and the U.S.
By 2018, when all of Australia’s ten LNG projects are on-stream, the country will have total liquefaction capacity of 85 mtpa, bypassing Qatar’s 77 mtpa. There are also as many as five major LNG projects currently under various stages of construction in the U.S. Consequently, global LNG markets will remain over supplied well into the next decade.
However, one should not feel too concerned for the Qataris in all of this. After all, they produce the cheapest gas in the world. In fact, the break-even price for Qatari gas is zero. They can sell LNG virtually for free and still make a profit. Sounds nonsensical but it’s not. Qatar mostly produces wet gas, with an abundance of natural gas liquids (NGLs), including propane and butane – that allows them to make the bulk of their profit from these NGLs.
Admittedly NGL prices, which largely track the price of oil, have also fallen substantially, but not so much that the Qataris aren’t still making a profit. All of this adds up to some profound realizations: Many greenfield LNG projects, those starting from scratch, particularly Australia’s new projects, have exceedingly high break-even points. According to a report by energy consultancy Wood Mackenzie, eight out of nine of the world’s highest break-even LNG projects are in Australia.
Moreover, the International Energy Agency (IEA) said in September that even if oil prices recovered and averaged $60 a barrel for the next few years, Australia’s LNG industry – one of the world’s biggest – will struggle to be profitable.
So, while most LNG projects worldwide watch anxiously as oil prices struggle to find a floor amid over supply, the Qataris can renegotiate long-term deals, seemingly giving away the farm, but still come out in relatively good shape.
Sure, Australia will eventually pass Qatar in a few years in terms of total liquefaction capacity, yet they nor anybody else in the foreseeable future will be able to compete with them on a cost basis nor match Qatar’s ability and latitude to renegotiate old deals, and cut new mutually advantageous deals. Qatar is ready for the brave new world embracing LNG, others however may not be.