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Is the World Heading Toward an Acute LNG Supply Shortage?
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In its latest liquefied natural gas (or LNG) outlook, Royal Dutch Shell plc predicts shortage of the fuel by mid-2020s despite a booming market.
Strong Demand Growth
Per the Anglo-Dutch energy giant, LNG demand reached 293 million tons last year – up by 29 million tons from 2016 and significantly higher than the 100 million traded in the year 2000. The nearly 300 million tons of LNG trade in 2017 (30% more than previously expected) was enough to power about 575 million homes.
Global LNG demand is likely to continue growing for a period and is projected to rise to around 500 million tons per annum by 2030. Supplies from Chevron-led (CVX - Free Report) Gorgon and Wheatstone mega-projects in Australia are already being absorbed by the strong demand.
The consumption boost is primarily set to come from Asian importers like China, South Korea and India as part of efforts to switch from coal and heating oil for environmental reasons. The secular shift to the cheaper, cleaner burning fuel for power generation resulted in 17 million tons of demand growth from Asia alone in 2017.
Japan remains the world's largest buyer of LNG but China leapfrogged South Korea to take the second place. The nation imported 38 million tons during 2017 as it transitions from coal to natural gas.
Inadequate Investment to Cause Supply Deficit
In its ‘2018 LNG Outlook,’ Shell warned that the industry is unlikely to meet supply by the mid-2020s due to a lack of investment in the sector.
The world’s number-one LNG trader believes that capacity will be sufficient going into the next decade as terminals approved for construction in the first half of the decade come online in the next few years.
As of now, Cheniere Energy, Inc. (LNG - Free Report) is the only company to receive Federal Energy Regulatory Commission (FERC) approval to export LNG from its 2.6 billion cubic feet per day Sabine Pass terminal in Cameron Parish, Louisiana. But with five LNG facilities likely to begin operations by the end of next year in just the United States, the industry will see a deluge of supply in the short-to-medium term that will take care of the rapid expansion in demand.
However, Zacks Rank #3 (Hold) Shell cautioned that lack of investment in new projects will lead to a shortage of the super-chilled fuel by 2025 unless new capital expenditures to the tune of hundreds of billions of dollars are made in export hubs such as Qatar and Australia as well as from the U.S., which has abundant supply of natural gas.
Natural gas prices are expected to remain low for the time being as U.S. production reaches record highs in recent years. Despite the glut, the Anglo-Dutch company sees LNG supplies slipping back to 300 million tons per annum by the middle of the next decade.
While lower spending in the sector since the 2014 energy slump is a factor, the genesis of the problem lies in the change in arrangement that importing countries get into with the exporters.
Usually, sellers sign long-term deal with customers with the key element being the supplier's ability to underwrite investments in the huge terminals that process natural gas and ship it abroad in its cooled, liquid form. Though a major proportion of buyers are still okay with the existing setup, many importers are now favoring more flexible agreements that allows them to opt for fewer tons of supplies over a shorter period of time. These more affordable spot deliveries – made on an ‘as-required’ basis – increased 17% in 2017 to all-time high 1,100 cargoes.
Moreover, the flexible supply contracts have shifted the power to the buyers from the producers. The growing trend for the short-term awards help the price-sensitive importers to take advantage of market-driven fluctuations. With the world’s biggest Asian LNG players looking to establish trading hubs to improve liquidity and transparency, a greater adoption of short-term sales contracts looks more and more likely.
In the meantime, though, the divergence between importers’ and exporters' preferences continue to loom large over the industry and put a spanner on new investments by suppliers such as Shell, Chevron, Total S.A. and ExxonMobil (XOM - Free Report) .
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Is the World Heading Toward an Acute LNG Supply Shortage?
In its latest liquefied natural gas (or LNG) outlook, Royal Dutch Shell plc predicts shortage of the fuel by mid-2020s despite a booming market.
Strong Demand Growth
Per the Anglo-Dutch energy giant, LNG demand reached 293 million tons last year – up by 29 million tons from 2016 and significantly higher than the 100 million traded in the year 2000. The nearly 300 million tons of LNG trade in 2017 (30% more than previously expected) was enough to power about 575 million homes.
Global LNG demand is likely to continue growing for a period and is projected to rise to around 500 million tons per annum by 2030. Supplies from Chevron-led (CVX - Free Report) Gorgon and Wheatstone mega-projects in Australia are already being absorbed by the strong demand.
The consumption boost is primarily set to come from Asian importers like China, South Korea and India as part of efforts to switch from coal and heating oil for environmental reasons. The secular shift to the cheaper, cleaner burning fuel for power generation resulted in 17 million tons of demand growth from Asia alone in 2017.
Japan remains the world's largest buyer of LNG but China leapfrogged South Korea to take the second place. The nation imported 38 million tons during 2017 as it transitions from coal to natural gas.
Inadequate Investment to Cause Supply Deficit
In its ‘2018 LNG Outlook,’ Shell warned that the industry is unlikely to meet supply by the mid-2020s due to a lack of investment in the sector.
The world’s number-one LNG trader believes that capacity will be sufficient going into the next decade as terminals approved for construction in the first half of the decade come online in the next few years.
As of now, Cheniere Energy, Inc. (LNG - Free Report) is the only company to receive Federal Energy Regulatory Commission (FERC) approval to export LNG from its 2.6 billion cubic feet per day Sabine Pass terminal in Cameron Parish, Louisiana. But with five LNG facilities likely to begin operations by the end of next year in just the United States, the industry will see a deluge of supply in the short-to-medium term that will take care of the rapid expansion in demand.
However, Zacks Rank #3 (Hold) Shell cautioned that lack of investment in new projects will lead to a shortage of the super-chilled fuel by 2025 unless new capital expenditures to the tune of hundreds of billions of dollars are made in export hubs such as Qatar and Australia as well as from the U.S., which has abundant supply of natural gas.
(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)
Why the Underinvestment?
Natural gas prices are expected to remain low for the time being as U.S. production reaches record highs in recent years. Despite the glut, the Anglo-Dutch company sees LNG supplies slipping back to 300 million tons per annum by the middle of the next decade.
While lower spending in the sector since the 2014 energy slump is a factor, the genesis of the problem lies in the change in arrangement that importing countries get into with the exporters.
Usually, sellers sign long-term deal with customers with the key element being the supplier's ability to underwrite investments in the huge terminals that process natural gas and ship it abroad in its cooled, liquid form. Though a major proportion of buyers are still okay with the existing setup, many importers are now favoring more flexible agreements that allows them to opt for fewer tons of supplies over a shorter period of time. These more affordable spot deliveries – made on an ‘as-required’ basis – increased 17% in 2017 to all-time high 1,100 cargoes.
Moreover, the flexible supply contracts have shifted the power to the buyers from the producers. The growing trend for the short-term awards help the price-sensitive importers to take advantage of market-driven fluctuations. With the world’s biggest Asian LNG players looking to establish trading hubs to improve liquidity and transparency, a greater adoption of short-term sales contracts looks more and more likely.
In the meantime, though, the divergence between importers’ and exporters' preferences continue to loom large over the industry and put a spanner on new investments by suppliers such as Shell, Chevron, Total S.A. and ExxonMobil (XOM - Free Report) .
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Click for details >>