A publication from the Oxford Institute for Energy Studies recaps and analyses the recent and expected evolution of the LNG market, which slowly seems to become more merchant and liquid. These developments should also let us think about the sustainability of a fuel that could have an increasing role in the energy mix.
In the “New Players, New Models” presentation, the Oxford Institute for Energy Studies (OIES) explains and summarises what has been happening in the LNG market from the 1970’s till now and what could happen in the future. The document specifically focuses on the increasing level of liquidity and flexibility of the LNG market.
LNG market changes
LNG has been present in the global energy mix for quite a while, but in the last couple of decades the worldwide supply saw an impressive increase. This was due to the Middle East supply growth and the more recent US shale gas “revolution”, which was coupled with the development of liquefaction capacity. On the demand side there is the hunger for energy of China and South-East Asia; but also Europe is looking more and more at LNG to diversity and make more flexible its energy supply, with new terminals in the pipe and the existing ones still underutilised. Natural gas/LNG is indeed considered as one of the key ingredients of decarbonisation at least for the next few decades, and can support the coal phase-out plans of countries like Italy and Germany.
As demand and supply evolve, the contracts do as well. Traditionally the LNG market has been based on very-long term contracts and fixed links between LNG suppliers and buyers in order to preserve the security of supply and develop the needed capital intensive infrastructure.
Through several steps (intermediate market models) and following the market evolutions, new and multiple market players penetrated the LNG market value chain, progressively destructuring a centralised and rigid market towards a fully merchant model. LNG is becoming a globally traded market, liquid enough to remove volume offtake risk and with full destination/contract flexibility for cargoes, with the possibility of multiple resales. The pricing is changing accordingly: from a delivery price based on oil indexation to a market based price. It is estimated that up to 50% of the LNG could be merchant traded in 2020.
Is a fully merchant market really possible?
But while describing such contractual changes progressing, the OIES also invites us to take a look at the bigger picture. Considering the current forecasts by 2030, the LNG market will show a significant demand-supply gap. OIES reports that by 2030 150 million tonnes additional LNG capacity could be required, which is quite a lot if we consider that according to IGU 2019 World LNG Report in February 2019 the global nominal liquefaction capacity was equal to 393 million tonnes.
This new capacity means an estimated $ 150 billion investment between 2019-2025 in liquefaction, associated facilities and ships. And, as the OIES points out “in order to secure financing, and support this level of investment, project developers will need to secure offtake agreements to underpin the investments”.
It follows that, since the LNG market is still in transition towards the merchant model, with a spot market still immature, “old” style long-term contracts will still be needed to secure such investments. Today buyers are “seeking greater contractual flexibility in order to meet their domestic gas demand uncertainties”, while sellers/lenders are facing the large upfront infrastructure requirements in a non-fully liquid market, and they all need to find a common ground to make things happen.
LNG: a “sustainable” fossil fuel?
A final remark goes to the LNG sustainability… the liquefaction process is very energy intensive, so that the extraction and production emissions can be higher than the pipeline gas ones, while when the gas comes from fracking it can be no better than coal.
These aspects bring us to the need of life-cycle assessments (LCA) of different fuels and technologies before (or at least during!) their massive deployment. The LCAs results should then be considered when planning out our energy present and future, such us the EU 2030 climate and energy targets.