Gas glut, what gas glut??
We revisit the LNG theme in APAC, generating a bottom-up Asian LNG demand and supply model, and conclude that near-term demand strength will continue to support highly correlated LNG/crude oil prices.
■ Demand: Fukushima + Korea have created a near-term LNG supply gap. Asia usually runs with little or no near-term uncontracted LNG demand, but a combination of the Fukushima incident plus under-contracting in Korea has led to a material five-year supply gap.
■ Near-term supply: Qatar and spot cargoes will do the heavy lifting. Qatar stands alone in its ability to meet the majority of Asia’s near-term shortfall, given its speculative ramp up of LNG supply in the last 24 months.
■ Asian LNG prices will continue to firm up. Qatar will seek to convert short-term supply into long-term contracts, while the ongoing need for spot avails will support spot prices in the medium term.
■ Beneficiaries. In the short term, Qatar, in the mid term suppliers such as BG bringing ‘portfolio’ LNG to Asia, and towards the end of the decade Chevron, Woodside, Inpex and Origin as they sanction further LNG projects to meet Asian demand (such project sanctions required in the 2013/14 window) will be the beneficiaries.
Asian LNG price premium to prevail
In this report, we revisit the LNG theme in APAC, generating a bottom-up Asian LNG demand and supply model, concluding that near-term demand strength will continue to support highly correlated LNG/crude oil prices. Uncontracted demand: 49 mn tpa by 2015
Unusually, Asia has more than 25 million tonnes per annum (mn tpa) uncontracted from 2012E rising to 49 mn tpa by 2015E. There are two drivers for this anomaly—first, the immediate and ongoing requirement for incremental LNG in Japan following the Fukushima incident and a decision in Korea to not proceed with two material initial agreements with Chevron LNG projects (Gorgon and Wheatstone) and instead aggregate uncontracted demand for a supply auction—presumably by mid-year 2012 (as Presidential elections are due end-2012 and any LNG agreements require Blue House/Presidential
concurrence). Uncontracted supply: Only Qatar has near-term avails
In the near term, Qatar is the only game in town. Looking at uncontracted supply, considering all AU projects (existing, debottlenecking, projects in FEED and speculative), all proposed projects in North America (both the US and Canada) and Qatar production that could be redirected from other markets, it is clear that Qatar has a near monopoly on uncontracted supply until 2015. This will have a crucial bearing on contract prices in Asia, as Qatar looks to reimplement its preferred approach, which is Crude Price Parity.
Price: Qatar in the driving seat again
Embarking on an ambitious capacity expansion plan, Qatar had originally assumed that it would be the swing supplier of LNG in 2009–11 and was implementing a strategy for seeking Crude Price Parity (CPP) for long-term Asian contracts. The market crash in 2008 challenged the strategy but Qatar did not blink, instead ramping up its production more slowly and fortuitously finding multiple new markets in 2010/early-2011 to supply LNG. With the Fukushima disaster and continued robust global LNG demand Qatar stands again as the swing supplier into Asia until the middle of the decade, and will again work to
secure highly correlated prices for its LNG to crude.
Conclusion: Asia short of LNG until 2017
Asia will be short LNG until 2017: Pulling together the demand and supply, analysis suggests that Asia will be short of LNG supply until 2017. In Figure 54, we show firm demand (including the effect of optional volumes being supplied) versus firm uncontracted supply. As shown in Figure 31, Qatar is the only material holder of uncontracted supply in the 2012–15 window, and we fully expect Qatar to supply at least the 9 mn tpa mentioned in the previous section, and, in the case of supply to Japan, convert short-term supply into long-term contracts at prices approaching Crude Price Parity (CPP). In 2017–18, ‘firm’ uncontracted supply (including NALNG) can meet uncontracted supply, but further project
sanctions for 2019+ will be required, where we believe a preference for brownfield expansions such as Chevron’s Gorgon & Wheatstone will be successful.