Bottlenecks could derail LNG growth

The world needs clean energy, and unless you are from Norway, renewables – wind, hydro, solar and wave power – alone are not capable of meeting the demands of a growing population.

Bountiful and environmentally attractive, natural gas and LNG are going to play major roles in meeting the world’s energy needs for the foreseeable future – if the industry can overcome some bottlenecks.

As the world continues to pivot away from coal, I see there are a number of favourable factors that point to a bright future for natural gas and LNG. Last year, for example, LNG demand jumped 9% to 319M tonnes driven by strong growth in Europe and Asia. Growth is expected to accelerate to 11% up to 354M tonnes this year, according to Shell.

One country that is at the center of the demand for natural gas and LNG is China. Anyone who has recently visited Shanghai knows firsthand that the country needs a breath of fresh air – literally. China’s LNG demand is being driven by strong economic growth coupled with an aggressive national stance on improving air quality by replacing the country’s coal-fired power plants with clean-burning natural gas ones. Already the world's second largest importer of LNG, China has drafted a plan to increase LNG imports by four-fold and expand the number of its import terminals from 19 to 34 by 2035.

Even as Europe continues to invest in offshore wind, there are ample growth opportunities for gas in the European power generation sector. Currently less than 40% of Europe’s power is generated by gas-fired plants, and Europe will need to import more LNG to offset its own declining production.

However, while LNG’s path ahead looks rosy, there are some bumps in the road that could derail its growth. One is the need for continued investment by LNG exporters in liquefaction capacity. The 37M tonnes of new LNG capacity that came online in 2018 was all absorbed by the market and the additional capacity slated for this year is expected to be gobbled up by Europe and Asia. To avoid a shortfall, major LNG exporters such as Australia, Qatar, Russia and the US need to ramp up capacity by quickly moving forward on FIDs for proposed export terminals.

The US, for example, has ambitions to be a major LNG actor on the global gas stage, but its trade war with China has left it playing the role of an extra. Despite China’s almost insatiable appetite for LNG, only six ships carrying US LNG landed at Chinese import terminals during the second half of 2018. More to the point, the trade war is also a stumbling block for investors looking to make FIDs on 12 new US LNG export terminals. Without the burgeoning Chinese market, those LNG export terminals just don’t look as attractive.

Rising transportation costs could also slow the progress of LNG. Last November, spot charter rates for standard-size LNG carriers shot up to US$190,000 per day because of a shortage of ships. The LNGC fleet grew by 12% last year but is expected to only grow about 6-7% this year and next. When delivered, many of the new LNGCs will already be tied to long-term charters, meaning that only a few vessels will be available for spot charter.

The good news is that shipowners are planning to order as many as 69 LNGCs this year, up from 65 in 2018 and a mere 17 in 2017. Newer ships will also be outfitted with smart ship technologies and lighter containment systems that will help reduce fuel consumption, increase capacity and lower transportation costs to keep LNG competitively priced now and in the future.