Australia's gas exporters are enjoying a brighter start to 2018 than for the last two years after stronger than expected growth in LNG demand last year averted a feared glut in supply and as oil prices reached levels not seen since December 2014.
A robust 11.6 per cent expansion in LNG consumption in 2017, spurred by soaring Chinese imports, meant that the increase in supply capacity as new projects started up in Australia and the US was absorbed, according to Singapore-based DataFusion Associates.
Bernstein Research put the LNG demand growth at 11 per cent, the strongest since 2011, and is forecasting consumption will almost double by 2030. It labelled the view that markets are oversupplied and that a surplus may last for several years as "misconceptions".
This year's growth in production from new projects could also be taken up by continuing expansion in demand, and even in 2019 the excess may be only 3 per cent of supply, said the founder of DataFusion, Tony Regan.
"What glut?" Mr Regan asked rhetorically in a report, referring to several gloomy predictions of oversupply that would plague the market from 2017 until at least 2020 and drag down spot prices.
Overall, in 2017, the market has been fairly balanced with a very tight market this [northern] winter."
Rising demand
LNG spot prices have doubled since mid-July and this week climbed another 1 per cent to $US11.22 per unit thanks to rising demand in China as factories and cities switch from coal to gas, and in emerging markets such as Pakistan.
Brent crude jumped 1.9 per cent overnight on unrest in Iran, and at more than $US68 a barrel is at three-year highs. Given LNG contract prices in Asia are typically linked to crude with a lag of three to six months, recent stronger prices point to higher LNG revenues by Australia's producers, which mostly sell under long-term sales deals.
Shares in the locally listed LNG producers reflected the buoyant mood. The biggest exporter, Woodside Petroleum, on Thursday added 2.7 per cent to close at $34.46, its highest since August 2015.
Oil Search, the biggest local participant in promising LNG expansions in Papua New Guinea, gained 3.6 per cent to $8.06. its highest since December 2015.
Mr Regan said he hoped the tightness in the market meant the industry would now start to focus on the "real issue", the shortfall in supply post 2020, given the long lead time needed to build plants and a dearth in recent go-aheads for new projects, with only one in 2017.
Still, the outlook for new approvals in 2018 looks more positive, with Bernstein saying this year will mark "the dawn of a new cycle" of growth in the industry.
Bernstein is estimating that more than 150 million tonnes a year of new LNG production capacity will be sanctioned over the next three to four years as markets rebalance.
It identified 20 top projects that it regards as having the best chance of moving forward, putting an expansion in Papua New Guinea near the top of the list as the lowest cost new supply, behind projects in Qatar, and well ahead of potential expansions in Western Australia such as Woodside's Browse project.
Project approvals
But Bernstein's head of energy research Neil Beveridge doesn't discount the WA projects moving forward despite the inflated costs of the last round of LNG construction in Australia, which included the "simply uncompetitive" $US54 billion for Chevron's Gorgon.
"While Australia has been written off by many [including ourselves] some of these projects are brownfield expansions [Gorgon T4 (train 4) and Wheatstone T3] or tie back to existing plants [Browse] which could still be competitive," Mr Beveridge said.
Mr Regan said that without more project approvals, the market could be short 7 million tonnes of LNG capacity in 2021, ballooning to 84 million tonnes in 2025 and 164 million tonnes in 2030.
He said that while developers of eight LNG projects are aiming to give the green light for investments this year it is unlikely all will proceed as they have "struggled to get support" from LNG buyers.
The 2017 LNG demand total of 294 million tonnes included a 38 per cent surge in China's imports to 38 million tonnes, DataFusion said. Imports by Japan, the biggest user, held steady, while Korean imports were higher than expected. Europe enjoyed strong growth of 22 per cent, thanks to demand in France and Turkey.
The robust market meant that while 31 million tonnes of new capacity came online last year – including at Gorgon and Wheatstone – the additional production of 28 million tonnes was more than offset by a 30 million-tonne jump in demand.
While global output could increase by 32 million tonnes in 2018, this could be absorbed by demand growth, so it will not be until 2019 that excess production may arise, put by DataFusion at a "not particularly significant" 11 million to 12 million tonnes.
The views contrast with Macquarie's recent bearish forecast of a potential looming oversupply that could last as long as 10 years if some countries push ahead with new plants in a battle for market share.
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