The global LNG market will remain tight through the end of the decade as growing demand in Asia, South America and Europe outpaces supply constrained by high costs and underdeveloped infrastructure, according to a study released Thursday by Bernstein Research.
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"We believe that markets are underestimating demand and overstating supply. ... While buyers may feel they have the upper hand, the market looks tight to us through 2020," the study said.
Among the growth regions identified by Bernstein, Asia is expected to be the most robust. Pollution and rising income levels are cited as the cause for the continued growth of LNG consumption in Asia.
Regional supply constraints will also be a factor. Historic exporters including Indonesia and Malaysia have recently seen a slowdown in natural gas production combined with growth in domestic gas demand.
"As a result, the region is shifting from being a net exporter of natural gas to being a net importer of gas," the report said.
While Japan, South Korea and Taiwan have historically been the largest importers of LNG, emerging economies -- most notably China and India -- are expected to propel 9% growth in regional demand through 2025 with total consumption reaching 850 billion cubic meter/year, according to Bernstein.
The authors dismissed the potential for any measurable impact on LNG demand from the nuclear restarts in Japan.
"We expect that six of the 17 reactors up for review will be approved this year and restarted in the second half of 2014. Looking beyond this year ... it is likely that at most 50% of the reactors will pass today's more stringent safety checks required for restart," the report said.
Another major growth region for LNG demand is Latin America, where consumption grew 18% during 2013 due to drought conditions that reduced electric generation capacity from hydropower. Most notably, imports to Brazil increased by 43% year on year during 2013.
Bernstein also identifies Europe as a potential region for LNG demand growth given a regional gas deficit expected to grow 6% annually. While Russian gas supplies dominate the European market, the authors expect that tensions between the EU and Russia may drive an effort to diversify supply sources, generating demand for LNG imports.
GLOBAL LNG SUPPLY TO INCREASE, BUT FACTORS MAY LIMIT GROWTH
On the supply side, startups in the US, Australia and North Africa are expected to increase global LNG supply by 30% over the next three years.
"Australian output will grow from 25 [mt/year] to over 90 [mt/year] as eight world-scale LNG projects start up," the authors said.
The supply picture from North America is slightly more complicated. In the US Gulf Coast, weak margins are expected to constrain growth of supply.
The cost of delivery to Asia is expected to reach $14/MMBtu. The delivery cost to Europe is estimated at $12.20/MMBtu and to Latin America at $11.70/MMBtu.
"We do not believe the landed price of long-term US LNG will be significantly lower than US $14/mscf in Asia, which is not substantially cheaper than the long-term oil-linked contract prices," the report said.
Adding to high costs are regulatory constraints imposed by the Department of Energy along with up-front capital costs for infrastructure that are likely to keep all but major oil companies from entering the market. Despite the growing list of potential North American LNG exporters, only a small number of proposals are likely to reach fruition, according to Bernstein.
"We believe that by 2020 only 3-5 terminal sites will be in operation or about 50 [mt/year]," the report said.
Another factor that will limit supply growth is the high cost of infrastructure development, including pipelines to bring gas to market and liquefaction facilities for export.
"Progress in LNG supply from new frontier markets [Canada, Mozambique and the Eastern Mediterranean] continues to proceed at a slower than expected pace, with new supply unlikely to be ready by 2020," the report said.