Global LNG plans face oversupply in classic boom-bust cycle

By REBECCA PENTY and BRADLEY OLSON
Bloomberg

Energy companies rushing to ship liquefied natural gas to Asia face a familiar pitfall in the boom-bust cycle of commodity prices: the potential for too much supply.

With plans for dozens of the multibillion-dollar export terminals in North America alone, the industry is headed toward an overbuild that may depress Asian prices for a decade, according to a Rice University analysis. Capacity from proposed North American LNG terminals is more than triple the forecast growth in Asian gas demand by 2020, data from HSB Solomon Associates' Ziff Energy Group show.

“Capital flows to where it sees opportunity and everybody’s trying to grab that flag first,” Kenneth B. Medlock III, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy in Houston, said in a March 3 interview. “What happens is that you see too many people trying to grab the flag.”

ExxonMobil, Chevron and Cnooc are among companies that have proposed projects to export LNG to Asia, where gas prices are five times higher than in North America. A boom in output from shale-gas formations drove the price of gas to a decade low in the US in 2012.

The liquefaction buildout may start lowering Asian prices for the fuel after 2016 as US projects come online, Australian supplies rise and Japan boosts the amount of power it gets from nuclear energy, Greg Pardy, an analyst at RBC Capital Markets in Toronto, wrote in a Feb. 25 note.

Vying for Customers

“Not everybody accepts the fact that time is of the essence, but it’s overwhelmingly clear that it is,” Canadian Minister of Natural Resources Joe Oliver said in an interview Tuesday at the IHS CERAWeek conference in Houston. Canadian projects face competition from the US, Australia and other nations vying to supply Asian markets.

Construction has begun on the first US Gulf of Mexico export facility, as Chevron and others ponder final investment decisions for projects on Canada’s Pacific Coast. Gulf Coast LNG supplies may have a “transformative impact” on the global market, Pardy wrote.

The industry won’t overbuild LNG export capacity because the facilities are too expensive to do without signed contracts from buyers in hand, John Watson, CEO of Chevron, told reporters Tuesday after speaking at the CERAWeek conference. Many of the proposals will fall away without guaranteed buyers so supply won’t exceed demand, he said.

Irrational Exuberance

“Even companies the size of Chevron don’t build LNG plants without having contracts in hand,” Watson said.

Irrational exuberance in the LNG industry has occurred before. Many of the US LNG export proposals are reconfigurations of import facilities that became redundant after producers were able to extract vast supplies of the fuel from North American shale, overwhelming domestic demand and deflating prices.

The “first wave” of US LNG will amount to about 9 billion cubic feet/day, about 15% of the global LNG marketplace by 2020, said Michael Smith, chairman and CEO of Freeport LNG Development LP, which is building an export facility in Texas.

“The world’s going to need it,” Smith said in an interview at the conference. “The appetite for LNG just keeps growing and growing.”

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