Energy demand growth and new investment opportunities, the future of global LNG trade looks bright; 2019

Energy demand growth and new investment opportunities, global LNG trade future looks bright in 2019. LNG (Liquefied Natural Gas) refers to natural gas processed in its liquid form. After treatment, liquefaction allows to condense natural gas into LNG by reducing its volume by a factor of nearly 600 for the same calorific value, which facilitates its transport by sea. It is essentially composed of 90% methane and is odorless, colorless, non-corrosive and non-toxic liquid.

An “LNG chain” is set up when the construction of a gas pipeline is not practical, in most cases because of excessive construction costs, transport distance, an imposed maritime stage or geopolitical constraints. Several major stages constitute this LNG chain, from liquefaction of natural gas to regasification, in order to supply gas to end-users. LNG growth in new markets has been facilitated by the rise of enabling technologies such as FSRUs and FLNGs. These have reduced LNG import risks, in particular by reducing costs, which facilitates financing and speeds up implementation times.

 

What are FLNGs and FSRUs?

Most of the future growth in gas demand will be in areas where pipeline gas supply is neither economic nor practical. These sites, mainly in Asia and Europe, will generate growing needs for natural gas in liquefied form which will generate demand for additional LNG production capacity.

An FLNG, or Floating Liquefied Natural Gas, is a floating plant that transforms offshore gas into liquefied natural gas. Both an extraction platform and a natural gas liquefaction plant, it is not a ship and doesn’t have its own propulsion system; it can be reused after the depletion of a gas field.

It is usually designed to withstand cyclones of high categories. Floating above an offshore natural gas field, the FLNG facility produces, liquefies, stores and transfers LNG (potentially LPG and condensate) at sea before carriers ship it directly to markets. Thanks to this technology, there is no need to build an onshore liquefaction plant or expensive gas pipelines to bring gas ashore.

energy

International Gas Union, Natural Gas Facts & Figures

FSRUs, or Floating Storage & Regasification Units, are floating LNG import terminal. In addition to transporting LNG, FSRUs have the onboard capability to vaporize LNG and deliver natural gas through specially designed offshore and near-shore receiving facilities, and deliver regasified LNG at pipeline pressure at different flow rates.

FSRUs are mobile installations capable of providing a market in which gas is the main source of energy in areas where it is not possible to install regasification terminals on land. They allow gas importing countries to diversify their sources of supply, which are essential for maintaining a certain level of independence in the field of energy. The main goal of the FSRU solution is to continue to attract gas importers anxious to fast-track new supplies on the international market.

They have 3 advantages:

  • Cost Effective:This solution is more cost effective per MMbtu than a traditional land-based solution
  • Time Efficient: It can be implemented in 1 to 3 years versus a land-based terminal which typically takes 4 to 6 years to develop
  • Minimal Footprint:It requires less land use than a land-based terminal, thus minimizing environmental impacts to the surrounding environment

 

Factors influencing the growth in energy

Several factors influencing the growth of energy demand have been identified. Long-term trends could create investment opportunities in energy over the next two decades.

 

Demographic growth

According to the International Energy Agency (IEA), primary energy demand by 2040 will be a quarter more that of today, while the population will grow by 1.7 billion and will strive to improve their quality of life. Currently, the Earth’s population is growing by 60,000 every 8 hours, or 2 children born every second somewhere in the world. Experts believe that if we continue to grow at this rate, we will need 50% more energy to support humanity by 2050.

Thus, in 2040, the world population should clearly exceed 9 billion. Not only that; more people mean we will need more food, water and shelter, which will also put our renewable resources under severe strain. Nevertheless, considering the areas where population growth has been the fastest, those are not the same countries that consume the most energy. For example, the United States has a population of just over 300 million, about 5% of the world’s population, however they consume 20% of the world’s energy and generate 19% of greenhouse gas emissions on the planet. China, which owns 20% of the world’s population, is responsible for 33% of its greenhouse gas emissions.

Developing countries such as India and certain African countries consume much less energy but contribute to the demographic crisis. India is almost the opposite of the United States in terms of energy consumption, using only 5% of the world’s energy, but with nearly 1.2 billion people, and has nearly 17% of the world’s population. Demographers predict that three quarters of the world’s population will reside in Asia or Africa despite this unjust and unbalanced breakdown around the world.

The growing world population will create new competition for energy resources. This will likely also encourage new energy innovations as fast-growing countries struggle to cope with growing demand and limited energy resources. China and India, in particular, will face the biggest challenges in managing population growth. As people in these countries continue migrating from rural areas to cities, demand for energy will certainly increase and it could have a huge impact on energy prices.

Population and energy consumption can only be linked, and as each human born, commodities become more precious. If we assume that the United States currently consumes 20% of the world’s energy, how much energy will the country consume in 2050 if it reaches a population of 450 million as estimated by the United Nations?

 

The share of global electricity

Nearly 1.3 billion people in the world do not have access to electricity. The World Bank reported that the least electrified region in the world is sub-Saharan Africa with 62.5% of its population having no access to electricity, followed by India with 20.8% of the population, South Asia 19.9%, and the rest of the world 3%.

Over the next two decades, India and other emerging countries will invest in grid infrastructure as their economies grow. These new generators of electricity will require crude oil, natural gas, coal, nuclear energy or renewable energies, to function. As access to electricity reaches more and more economies around the world, energy needs will inevitably increase.

 

Industrialization in developing economies

Industrial energy demand could exceed 70% by 2040. However, most of this demand will be generated by developing economies. According to ExxonMobil, industrial energy demand in India is expected to triple by 2040. India and other developing countries in Asia, the Middle East and Africa will need factories for the supply of metals, machinery and manufactured products. This new source of industrial energy demand could offset the slowdown in industrial demand in developed countries. It also helps countries lift many people out of poverty because it forces people to work in factories and allows them to escape poverty, thereby promoting economic growth in the country.

 

The revolution in energy efficiency

The expected growth of energy in developed countries is not due to bad economic conditions. On the contrary, developed economies in North America and Europe will benefit from increased energy efficiency in the coming decades. More efficient natural gas-fired power plants, smart grid technology and fuel-efficient cars are some of the developments that can lead to a new energy efficiency revolution. It will be interesting to see the measure to which these technologies can evolve and how they could change the shares of renewable energy consumption versus non-renewable energy.

 

Growth in emerging countries

One of the most important trends in energy markets is the disparity in energy demand between developed and developing countries. World energy consumption is expected to increase by almost 30% over the next two decades. However, growth in developed countries is expected to remain stable. In other words, the emerging countries will represent the entire increase. This forecast could have a significant impact on commodity markets. Traders need to pay close attention to the economic growth of emerging markets, as well as new sources of energy supply in these emerging countries.

 

The future of global LNG trade looks bright

 Despite the widespread promotion of energy efficiency policies, global energy demand is expected to continue to grow over the next few decades. LNG is expected to grow at a much faster rate than natural gas as a whole, due to the large distances between many supply centers and demand centers.

FSRUs and FLNGs have changed positively the LNG market. They have enabled many more countries to enter the market much faster, become LNG importers, and at a much lower cost than building a land-based receiving terminal. They are a key driver behind the significant and rapid growth of emerging market LNG imports and encourage many new liquefaction projects.

Most recent import projects are promoted by joint ventures between local companies and international LNG suppliers (Qatar Petroleum, etc.), midstream solution providers (Excelerate Energy, Golar LNG, Höegh LNG, OLT, MOL, etc.) and power plant suppliers (Siemens, General Electric, etc.).

In a context of excess LNG supply, aggregators and traders support the creation of these new markets and provide them financial strength and project management skills that are lacking in many countries aspiring to import LNG. Examples include Bahrain LNG, Sergipe and Açu 1 in Brazil, and Ivory Coast LNG in Côte d’Ivoire. Trading companies such as Trafigura and Gunvor are also investing in FSRUs in Pakistan and Bangladesh to diversify their activities.

In 2018, nominal liquefaction capacity increased by 7% at the end of the year, reaching a total capacity of 382.9 MTPA (Million Tonnes Per Annum). This increase is due to new projects rather than expansions of existing liquefaction plants. As of February 2019, commercial starts have brought total capacity to 392.9 MTPA.

Yamal LNG in the Russian Arctic (11 MTPA total); Ichthys LNG Train 1 & 2 (8.9 MTPA) and Wheatstone LNG Train 2 (4.45 MTPA) in Australia; Cove Point (5.25 MTPA), Corpus Christi LNG Train 1 (4.5 MTPA) and Sabine Pass Train 5 (4.5 MTPA) in the US; Kribi FLNG in Cameroon (2.4 MTPA), contributed to this growth. 

 

Existing Capacity

 

investment

 

IHS Market, IGU; Nominal Liquefaction Capacity and Utilisation by Market 2018

As of January 2019, there are 20 markets with existing liquefaction capacity (figure above). In September 2018, Qatar has a total liquefaction capacity of 77 MTPA and remains in first place. Qatar Petroleum plans to add a 4th new liquefaction train to increase its total liquefaction capacity target after expansion to 110 MTPA.

The start-up of Ichthys LNG T1 in the New Year, and thanks to the output of 10 liquefaction projects distributed between Western Australia, Northern Territory and Queensland, pushed total Australian liquefaction to 75.4 MTPA, 79.9 MTPA by January 2019, and remains in second place. At the same time, 3 of the country’s southern states – New South Wales (NSW), Victoria and South Australia – are pushing ahead with plans to commence LNG imports based on the use of FSRUs. At the end of 2018, Qatar, Australia, United States, Indonesia, Malaysia, Algeria, and Nigeria all together comprised over 71% of nominal liquefaction capacity.

 

Under Construction

 

IHS Market, IGU; Nominal Liquefaction Capacity by Country in 2018 and 2024

As of January 2019, 101.3 MTPA of liquefaction capacity was under construction or sanctioned for development. In Australia, the Prelude FLNG which recently began commercial operations this year and Ichthys LNG T2 which started exporting in October 2018 are leading contributors in the ongoing wave of capacity additions. More than 75% of global capacity under construction (77.4 MTPA) is located in North America, with LNG Canada as the only non-US project in that category.

Further capacity is under construction in Indonesia (4.3 MTPA) partly thanks to a FSRU having a production capacity of 2.4 MTPA that will be built by 2021 for the JAVA-1 project, the largest project of its kind in South East Asia. Malaysia (1.5 MTPA), as pipeline infrastructures are lacking, the country would like to be able to transport natural gas in the best way. Russia (3.6 MTPA).

Mozambique (3.4 MTPA), as in September 2018, the Italian ENI announced the start of construction of its Coral South FLNG facility for a production of around 3.4 MTPA of LNG that will start in 2022. Argentina (0.5 MTPA), through the deployment of Tango FLNG at the port of Bahía Blanca in the second quarter of 2019, Argentina will join the ranks of LNG exporters with an initial export project of 0.5 MTPA to overseas markets.

Thailand has become a promising market and started importing LNG in 2011. PTT is also developing the Nong Fab LNG Receiving Terminal in Rayong scheduled to commence operations by the second quarter of 2021 with a regasification capacity of 7.5 MTPA and a peak output capacity of 9 MTPA.

Pakistan, suffered from severe energy shortages for many years. The country is taking action and starting to import LNG in 2015. Thus, it hopes to increase its imports to about 30 MTPA by 2020.

Bangladesh has seen its gas reserves dwindling, hydroelectric and wind resources are limited, lands for large-scale solar deployment are scarce and dependence on imported liquid fuels became too expensive. Thus, the country urgently needs more gas. In August 2018, Bangladesh became the world’s 42nd LNG import country thanks to the vessel that Summit chartered from Excelerate Energy on a 15-year deal and has now brought 130,000 cubic meters of LNG from Qatar.

Panama is the second country with Bangladesh to join the group of LNG importing countries, altogether 42 countries now. Indeed, many utilities in Central America and the Caribbean still depend on oil combustion to produce electricity, but LNG offers a cleaner, cheaper and more efficient alternative. In 2017, Engie and AES – Applied Energy Services, a major player in power generation and distribution in Latin America, the United States and Europe – established a joint venture to market and sell LNG to third parties in Central America, using the Panama terminal as a distribution center, with a capacity of 1.5 MTPA.

Poland and Lithuania would like to diversify gas supply sources as they are dependent on Russia’s Gazprom.

Egypt, who decided to raise its domestic production, was an exporter short of gas and has regained its self-sufficiency thanks to major discoveries. The country will nearly double its LNG export capacity to 2 billion cubic feet/day by the end of 2019, and plans to collaborate with Saudi Arabia in exploring hydrocarbon reserves in the Red Sea.

Kuwait and UAE want to switch electricity generation away from costly and polluting liquid fuels. Kuwait has set up a project for an LNG import terminal at Al-Zour that will be operational by 2022 with a regasification capacity of 23 MTPA and 8 storage tanks with a capacity of 225,000 m3 each.

 

Sub–Saharan Africa’s LNG

Sub-Saharan Africa is a significant exporter of LNG from projects in Nigeria, Equatorial Guinea, Angola and Cameroon.

Nigeria LNG project currently has six trains in operation, with a combined production capacity of 22 MTPA. The company has scaled back its expansion plan to a single 8 MTPA train and hopes to reach FID (Final Investment Decision) by the end of 2019.

In 2018, Cameroon became the newest LNG exporter when Kribi FLNG (2.4 MPTA) loaded its first cargo in May 2018. Prior to this, Papua New Guinea in 2014 was the most recent nation to add liquefaction capacity.

Senegal and Mauritania will become exporters of LNG from 2022. Partners in the Greater Tortue FLNG project to be based offshore Mauritania and Senegal announced FID in December 2018 for the 2.5 MTPA first phases, but have yet to award construction contracts.

 

China’s LNG Import Growth

China, Japan and South Korea imported 55% of the 391 billion m3 of LNG sold last year and will buy 48% of the 505 billion m3 of LNG sold in 2023. LNG sales of all Asia alone will account this year for 75% of all LNG sales in the world, compared to 72% last year. (Sources: global LNG report 2019, DLA Piper)

In Japan, the Fukushima nuclear disaster has accelerated demand following the decommissioning of nuclear power plants. Japan remains for the moment the world’s largest importer of LNG. Then we have China with more than 54 million tons in 2018, then South Korea. It should be noted that 2017 was the year in which China overtook South Korea to become the second largest LNG importer in the world.

The country received nearly 10 million tons of LNG more than South Korea, which imported a record 44 million last year. China will therefore become the world’s leading importer of LNG. It also has good relations with Russia, whose Russian LNG exports to the Asian market reached 12.86 million tonnes in 2018. At the same time, China is investing in LNG projects in Australia, East Africa and elsewhere, and most of the investment will come from own funds.

LNG imports growth since 2015 has been spectacular for China. In 2017, a quarter of all LNG imported by China, about 10 million tonnes, was delivered to customers by truck, due to pipeline constraints. The country imported 54 million tonnes of LNG in 2018; an increase of almost 38% compared to 2017, and only 19.7 million tonnes in 2015.

During December 2018, Chinese LNG imports rose by 6.29 million tonnes representing an increase of 25.9%, setting a record for monthly LNG imports. The Chinese government is seeking to improve its environment by abandoning coal to tackle air pollution, but also to meet its commitments to tackle climate change under the Paris Agreement. China will need to increase its gas storage capacity to meet growing seasonal needs. At present, it has about 10 billion cubic meters of storage space, or about 4% of its annual demand.

 

Global key information
  • Nominal liquefaction capacity increased by 7% at the end of 2018, reaching a total capacity of 9 MTPA
  • As of February 2019, commercial starts have brought total capacity to 9 MTPA
  • Natural gas meets almost 25% of the global energy demand, with 7% of that supplied as LNG
  • US and Australia both ramped up supply of LNG, with China, South Korea and other Asian nations leading demand growth
  • Bangladesh and Panama joined the importers’ ranks last year, bringing the total number of importing countries to 42
  • One new country, Cameroon, started exporting LNG in 2018; bringing the total number of exporting countries to 20

Sources:

https://www.lngworldshipping.com

https://www.oxfordenergy.org

https://excelerateenergy.com

https://www.igu.org

https://www.scmp.com

https://www.reuters.com

https://www.dlapiper.com

 

Ilias KACHMAR

Ilias KACHMAR

Ilias KACHMAR is a business engineer. After being under-graduated in electronics and computing sciences, he obtained a master degree in strategy & business development and a specialized master in commodities trading. He began his career as business developer for the semiconductor giant STMicroelectronics in Paris, and is pursuing his career in financial markets.


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