Liquefied Natural Gas Prices: Grim Present and Stable Future

Merrill Lynch recently released a report discussing the jumps in liquefied natural gas (LNG) prices this summer. According to the report, the price has risen to a 4-year high above $ 18/MMBtu. This surpassed highs reached at onset of winter in 2011, but it is expected that price will be stable ahead in the future.

Indeed, a myriad of factors have contributed to supply and demand movements of LNG, and hence price change. These include high demand on LNG ahead of peak summer season, changes in LNG imports, varying economic performance across the world, changes in prices of crude oil, changes in gas storage capacity and political repercussions in the Middle East. The following is among the most important factors mentioned in the report.

Weather

Warm weather in Japan has reduced need for gas in power and heating, and hence has reduced demand on LNG. This caused Japanese LNG imports to decrease by 15 percent from last month. In India, the coming monsoon is expected to reduce demand on LNG. The Indian imports have already fallen to 967,000 mt, falling below the 1 million mark for the first time in 11 months. As for the Brazilian demand on LNG, the heavy rainfall has resulted in favoring the hydropower production and an increase in LNG demand in Q1 2012. This is nearly double that of the same quarter last year.

Production facilities

Maintenance at 3 Qatargas units, which pump LNG has reduced supply and hence caused prices to go up. However, it is expected that exports will be resumed after maintenance is done. Indonesia will also be adding four cargoes this month from Tangguh plant increasing the LNG supply by 5.5 million mt during Q1, 2012. This will likely cause a reduction in prices of LNG.

Besides Indonesia, other countries will be adding cargoes, including Nigeria, Trinidad, Alaska, Angola and Australia. It is the latter where the Pluto production facility has been long waited for and will be opened in mid-May with capacity of 4.3 mmpta. Regarding the Angolan liquefaction plant, it is expected to start pumping LNG in July adding 5.2 mmpta to the LNG supply.

Besides having the LNG demand growing strongly while supply growth is slowing, no major supply additions are expected after those of Angola LNG and Pluto this year. This means that LNG liquefaction capacity is only growing by 0.3 bcf/d (or 2.3 million mt) this year and slightly higher at 1.3 bcf/d (or 8.8 million mt) in 2013, on Merrill Lynch estimates.

Hence, it is highly expected that excess liquefaction capacity will remain tight through the next few years, averaging 1.5 bcf/d (11.0 million mt) this year and 1.8 bcf/d (13.3 million mt) next, down from 3.3 bcf/d (24.3 million mt) in 2011.

The report also mentions that the Japanese LNG demand growth remains very strong, with April imports up 15 percent YoY despite coming down from Q1, 2012 highs. More recently, the country has even reportedly started importing from non-traditional suppliers like Spain and Brazil.

Political events

LNG pipelines were attacked in Yemen causing a disruption in production and reduction in supply, which in turn raised prices upward. Fortunately, Yemeni exports of LNG will be resumed at end of May reducing pressure on prices of LNG.

Strength of economies worldwide

Both Asia and Latin America continue to show strong economic prospects, and hence high demand on LNG. This offsets falling imports into Europe and North America and helps in pushing prices upwards. LNG demand growth has been very strong in Brazil, Argentina, and Chile building out nearly 15 mmpta of import capacity in the past four years.

However, China's grim economic prospects have reduced the demand on electricity, which in turn reduced the demand on LNG, particularly in April. Similarly, the ongoing banking crisis in Europe is major contributor in reducing demand on LNG. Indeed, over the last six months through March, the demand was about 12 percent less than the same period last year. The report predicts that this low demand will continue ahead in the future.

Supplies in storage

LNG supplies in storage appear to be in ample after buying large amount of LNG in preparation for peak summer season. In addition, the UK continues to receive the Qatari LNG, which is equal to about 1 million mt per month over the past few months. Together with weak demand and stable domestic production, supplies are relatively kept abundant reducing the demand by 25 percent on Qatari LNG during the Q1 2012 compared to the same period last year.

In Indonesia, the first floating storage and regasification unit (FSRU) in West Java is aimed to reduce LNG exports for the benefit of domestic consumers given that it will handle 3 mmtpa of imports per year. Moreover, in Malaysia, the 3.8 mmtpa Melaka import terminal is expected to start in August and will enable the country to start receiving LNG in the west.

On the contrary, the declining domestic supplies in Argentina pushed the country to import more natural gas rising demand incredibly by 142 million mt YoY, or 33 percent, in Q1 2012. The report expects the Argentinean demand to continue to rise as canceled deliveries from Repsol must be made up after its seizure of YPF.

In Japan, the regas capacity stands at 185 mmtpa. Yet, infrastructural constraints will reduce this figure to approximately 85-90 mmtpa. These constraints include limited berths, terminal to utilities pipelines and transportation from terminals to gas-fired plants. Further, gas-fired power generation plants are operating at 85-95 percent of capacity only.

Fuel substitutes

Having the Japanese nuclear plants closed after the March 2011 earthquake/tsunami, further pressure was put on increasing LNG price since the LNG is a close substitute for nuclear energy. Indeed, 70 percent of Asian LNG growth in demand is attributed to Japan. However, the Japanese LNG demand has been reduced compared to the same months last year when the Japanese nuclear power has fell to zero for the first time since 1966.

The Japanese Trade and Industry Ministry announced an agreement to restart the Kansai's Ohi No. 3 and 4 plants, which represent a total of 2.4 GW of capacity. Amid strong controversy and uncertainty for future, the first reactor is expected to start generating power by the first week of July.

The report assumes that nearly 15 GW of nuclear plant power capacity will slowly come back online by the end of the year, starting with the Ohi 3 and 4 units by mid-summer.

As such, it is expected that Japanese LNG demand will reach 87.2 million mt this year, growing by 8.7 million mt compared to growth of 8.5 million mt in 2011. The report believes that more of the remaining nuclear power units will gradually restart over the next couple of years, but expect that some 15 GW of the original 50 GW may never be restarted.

The report also shows that over the period from January 2009 to January 2012, the crude oil price in US has risen constantly. As a strong substitute to LNG, this means that such high oil prices have also contributed in increasing demand on LNG.

All in all, the report expects the LNG supply to be less tight in the future, and hence LNG prices will not rise further in the future. This is given the fact of reopening of Japanese nuclear plants and the LNG supply additions in a number of countries around the world.