Development of mega LNG projects continues to suffer in a coronavirus-impacted market, with low demand, historically low LNG prices and an oil price war, writes maritime adviser and consultancy Drewry Maritime Research
The LNG market started 2020 with record low spot LNG prices, due to weaker-than-expected demand growth in Asia and additions to liquefaction capacity weighing heavily on the market. Without doubt the Covid-19 outbreak in China has weakened the prospects for a recovery, as the country’s LNG demand has taken a big hit, with little chance of a significant improvement before Q3 2020.
For 2020 we now expect LNG trade to grow by just 2% due to low demand. A mild winter and a decline in Asian spot LNG prices have resulted in higher inventories in both Europe and Asia, impacting imports; we do not expect the scenario to change as the market enters the seasonal low-demand period.
Reduced LNG demand in Europe and Asia resulted in low LNG prices globally with the UK NBP price at US$2.20 per million British thermal units (MMBtu) in March 2020, falling 29% from the start of the year, while the Asian spot LNG price declined to US$3.40 per MMBtu in February from US$5.90 per MMBtu in January.
The virus outbreak is also taking a toll on LNG production, as securing funding and supply deals is becoming increasingly difficult for planned liquefaction projects. This, in addition to the weaker economic scenario, has forced energy companies to reassess their investments, which will impact the development of many mega-LNG projects.
Furthermore, as most of the long-term LNG contracts have oil-linked pricing, the collapse in oil price threatens the profitability of some of the major planned LNG projects. Oil prices tumbled in March 2020 after OPEC+ allies Saudi Arabia and Russia disagreed on further production cuts. Disagreement in the alliance has effectively allowed all countries to raise their production levels, flooding the market at a time when demand has collapsed under the Covid-19 strain.
After a bumper 2019, when 64 mta of liquefaction capacity reached the FID stage, many projects were in advanced stages of securing FID in 2020. However, depressed LNG prices and the impact of Covid-19 on LNG demand have led developers to re-evaluate their strategies regarding projects, which mean delays in reaching FID and commencement of operations.
Major impacted projects include the Rovuma LNG project (15.2 mta) in Mozambique, Qatar’s North Field Expansion project (33 mta) and three export projects in the US: Driftwood LNG (27.6 mta); Rio Grande LNG (27 mta); and Lake Charles (16.5 mta).
Continuation of current conditions might even lead to the scrapping of some of these planned projects. Many of the planned projects targeted selling LNG at an average of US$8 per MMBtu; however, current market conditions and a further collapse in oil prices do not justify the price tag any longer.
Most of these mega projects were scheduled to start in 2023 to 2024 and possibly create a supply glut. However, delays in the planned projects reaching FID and those that are under construction will limit liquefaction capacity additions in the next five years. Meanwhile, many other proposed liquefaction projects will be scrapped or put on hold for a longer period.
The delay in these mega-LNG projects and limited liquefaction capacity additions are bound to have a ripple effect on the LNG shipping sector.
For starters, lower capacity addition will eradicate the possibility of excessive supply and will support LNG prices. The additional vessels required to 2024 to transport LNG will be reduced by about 40%, from 270 to 160. We also expect slippages to increase during the period, coinciding with the delays in the under-development of projects.
This would translate into lower orders for LNG vessels in the next three years. Project-based orders will decline, and speculative orders are expected to dry up, squeezing fleet growth.
Consequently, deliveries will slow down from 2022 and delays in liquefaction projects will also affect the development of LNG regasification infrastructure and other LNG-to-power projects, which will suppress demand growth.
Going forward, we can expect slower fleet growth with low project-based or speculative orders. New liquefaction projects will find it hard to get off the drawing boards as investors will be looking for a diversified portfolio of supply and purchase contracts before committing to FID.
The year 2020 is therefore expected to create a new ‘normal’ for the LNG shipping business – from trade, shipping demand and charter rates – which will be much less attractive than previously expected.
Mr Sud is a senior research analyst at Drewry Maritime Research and a regular contributor to the Drewry Shipping Insight report, covering global and regional gas shipping and the trade market.