The global liquefied natural gas (LNG) market is transforming. In early 2016, the USA is expected to start LNG exports from the Gulf coast, a plot twist that was unthinkable even 10 years ago. Australia will soon be an exporter on a scale to rival Qatar, while new importers are springing up from Panama and Lithuania to Egypt and Vietnam. LNG importers are becoming exporters and vice versa.
We have identified short-, medium- and long-term demand uncertainties:
1. Understand LNG demand holistically
Compare the attractiveness of different end-user geographies, including large, but mature, markets, big markets with potential for growth, and emerging niches. On a global scale, strategic choices by gas exporters to shift from one market to another — for instance, Russia’s changing pipeline focus from Europe to China — can open up LNG supply opportunities.
2. Segment markets by price-sensitivity and pricing basis
Some markets have gas-on-gas competition, some feature competition against oil-indexed pipeline gas, and in others, LNG competes against coal for bulk demand. Demand and price are further complicated by policies that distort pure economics. To understand demand intelligently, it should be measured against the right LNG price basis and policy mechanisms.
3. Create demand
Create demand by accessing niches and new markets and creating new import points by investing in or facilitating regasification terminals and connections. Joint ventures could be considered to create demand; for example, on gas-fired power plants in existing coal-using markets or on LNG shipping. Singapore’s ambitions in LNG bunkering point to a way ahead that may be linked to China and India for both sea and ground transport.
4. Understand buyers’ business strategies
Align with marketing and business strategies that will differ between a traditional large LNG project looking to secure anchor customers; a Henry Hub-based tolling project in the USA; a small floating LNG project; and a portfolio player or trader with many sources and destinations. These different business models need to match with the choice of pricing bases and contract durations and the access to physical infrastructure such as tankers and regasification terminals.
5. Maintain optionality and competitiveness
LNG is a cyclical business. The market will tighten again and prices will rise, benefiting companies with diverse portfolios that can be developed and traded quickly. Supply needs to be competitive against other LNG and other energy sources. For projects not yet in construction, seek LNG liquefaction cost reduction. During downturns, only the most advantaged projects — large, close to market and/or geologically favorable, can go ahead.
Execution and cost control are essential, as discussed in the recent KPMG papers, including Is Canada still considered an LNG supplier of choice? and Unlocking the supply chain for LNG project success.
6. Determine a strategy for mixed LNG/pipeline exports
Determine a strategy for mixed LNG/pipeline exports, in the case of exporters such as the Eastern Mediterranean countries, Russia and Algeria, who have a choice between the two export methods. This involves balancing netback pricing against strategic objectives of buyer diversification and maintaining access to premium markets while opening up new ones.
In our next paper we will consider impacts on supply for buyers. These two reports bring together key strategic decisions for each part of the market, including LNG producers, LNG traders and LNG buyers.
An LNG market that is globalizing, transforming and becoming more varied presents all participants with challenges. Uncertainty over demand from traditionally dominant buyers requires competitiveness and eyes for new markets from LNG producers and traders. Buyers, conversely, should make the most of their current strong position, while deploying new strategies.
The winners along the value-chain will be those who can act counter-cyclically, who can create and maximize markets, instead of reacting passively to them, and who can identify the major long-term trends driving LNG demand, while also staying flexible to seize emerging opportunities.