Death of LNG Projects Seen Kindling Market’s Revival From Slump

The demise of LNG projects such as Woodside Petroleum Ltd.’s planned $40 billion Browse facility due to a plunge...

The demise of LNG projects such as Woodside Petroleum Ltd.’s planned $40 billion Browse facility due to a plunge in energy prices is probably what will lift the market out of its current rut.

Buyers now have the advantage as U.S. exports add to a surge in shipments from Australia, exacerbating a global glut. The oversupply and the slide in energy prices the past two years have discouraged developers from committing to new liquefied natural gas projects.

“Ultimately we’ll set ourselves up for a shortage at the other end, and there will be another scramble some time toward the end of this decade for LNG,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said by phone. “Gas is structurally going to be in demand long term.”

Lower-cost projects, such as planned developments in Papua New Guinea, should be able to survive the downturn and capitalize on rising demand next decade, Beveridge said. Exxon Mobil Corp. and partners including Oil Search Ltd. are considering expanding their LNG development in the Pacific nation, while Paris-based Total SA and InterOil Corp. are part of a venture that’s planning the country’s second gas-export project.

Belt Tightening

Starting large new projects in countries including Canada and Mozambique, however, will be difficult and investors should expect setbacks, Beveridge wrote in a note Wednesday.

“The low and volatile energy price environment is forcing developers to tighten belts and we can expect more proposed projects to delay investment decisions,” James Taverner, a Tokyo-based analyst at IHS Inc., said by e-mail. “There are far more LNG projects competing to go ahead than the market can absorb.”

Asian spot LNG prices fell below $5 for the first time in January since at least 2010, according to New York-based Energy Intelligence Group. Cheniere Energy Inc. last month exported the first cargo of U.S. shale gas from its Sabine Pass complex in Louisiana.

Hazy Future

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Woodside and its partners including Royal Dutch Shell Plc and PetroChina Co. scrapped plans to develop the Browse floating LNG development after the plunge in energy prices. Woodside said the venture will prepare a new plan and budget for developing the gas resources off Western Australia.

Given the long lead times for LNG projects, if investment decisions aren’t made in the next several years to meet that demand, a supply squeeze is on the horizon, said Saul Kavonic, an analyst at energy consulting firm Wood Mackenzie Ltd.

“You are going to create a potential supply gap, there’s no doubt in my mind,” Woodside Chief Executive Officer Peter Coleman said in a phone interview Wednesday. “New projects will need to come through.”

The market could see a deficit of 75 million metric tons of LNG per year by 2025, which would require $250 billion in investment through 2020, Bernstein estimated in November. The market is “well-supplied” to 2018 and possibly to the end of the decade, it said.

“We anticipate that the market will tighten and a supply demand gap to arise in the first half of the 2020’s due to the natural decline of existing production facilities and longer term demand growth,” said Wood Mackenzie’s Kavonic.

To contact the reporters on this story: James Paton in Sydney at jpaton4@bloomberg.net, Stephen Stapczynski in Tokyo at sstapczynsk1@bloomberg.net. To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Aaron Clark, Pratish Narayanan

By: James Paton and Stephen Stapczynski

©2016 Bloomberg News

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