The LNG market continues its transformation. We have witnessed very few FIDs since 2016, but we expect a flood of FIDs over the next 24 months.

  After witnessing FIDs of some 15-20 million tonnes per annum for the past 15 years, in 2016, we had 6 mmt of FIDs; in 2017, only 3 mmt; and in 2018, so far only 4 mmt.

  The slow pace of FIDs is due to the low interest in customers willing to sign long-term contracts to underpin financing for the building of liquefaction plants. So what has changed?

  It has become clear that the lack of FIDs will inevitably result in a major shortage of LNG in the 2022-24 period. Many international players want to enter this tight market. As often happens in the LNG business, when everyone thinks of the same idea at the same time, we should start to worry about the consequences !

  The deep pockets of the majors after record profits in 2017 and 2018 have encouraged key players to move forward without waiting to sign up customers—relying on equity lifting and portfolio management to sell their products.

  As of today, we expect over 80 million tonnes of new LNG projects to be sanctioned over the next two years. These are all primarily non-US, non-Russian projects. If Arctic 2 is included, we are looking at 100 mmt of new LNG to come into the market during the 2024-26 period, inevitably resulting in a major surplus before the end of the decade. A substantial shortage of LNG is followed by a huge surplus.

  From the 80 mmt, less than 20 mmt currently have identifiable customers. For instance, the first LNG project which might be sanctioned is LNG Canada. Shell and PETRONAS will take their volumes in their portfolios; KOGAS and PetroChina will move their volumes into their own economies, and Mitsubishi Corp has quietly secured back-to-back sales for most of its volumes in Japan. This is a far cry from the days that SPAs with end-users were signed for the bulk of the volumes before the project was sanctioned.

  How about the many US projects? There is little doubt that the US projects are more competitive than most, if not all, of the projects in the queue to receive FIDs. But the US project owners are either private equity or small players. This is contrasted with large majors Shell, ExxonMobil, Total, or Eni, who are driving their non-US projects forward. Most of the US projects need firm SPAs to move forward. At the same time, US projects can deliver LNG at US$7-9/mmBtu to the customers at today’s Henry Hub prices. It is not easy to find many new projects which can beat them, beyond Qatari projects.

  Customers who have been reluctant to sign new long-term contracts, but were getting nervous that they must move to secure some new supplies, feel reassured that all these new projects will offer them a strong buffer against shortages. They feel confident that they will be offered medium term and more flexible contracts since supplies from these new projects are entering the market in any case. This further slows down their commitment to sign new long-term SPAs. This poses a major challenge to the US projects who may have the best economics, but not the deep pockets to move forward in the next year or two. In short, the lowest-cost projects may enter the market after the higher-cost projects!

  For the tight period of the early 2020s, very few can enter the market before 2024/25. Only one supplier has substantial volume from existing projects that can be sold in the gap—Qatar.

  In conclusion, the next transformation of the LNG market is not about the lowest-cost projects going forward. It is about the deep pockets and the courage to take on risks before customers sign up. Inevitable results will be the boom and bust cycle. A tight market in the early 2020s to be followed by a surplus market in the mid-2020s. But LNG has powerful inherent demand growth prospects. The inevitable mix of LNG bunkering and even more China imports for pollution issues, plus an expected jump in Indian LNG needs after the general elections in 2019 will slowly wipe out the surplus by the early 2030s and then once more, the boom and bust cycle will start. It is hard to understand why we cannot learn from history !

Fereidun Fesharaki