Having already grown by 2/3rds since 2005, global LNG production capacity is set to leap a further 50% over the next 5 years if all known projects are completed, according to a new analysis by Evaluate Energy. LNG demand in the Asia-Pacific is strong, but growing shale gas volumes in the United States – a trend unforeseen when these LNG projects were conceived and implemented – has lowered the expected demand curve thereby eating into the potential profitability of these new facilities and postponing the vision that investors originally had of the role of these giant projects.
It’s hard to know which way round this is working: to what extent is additional spot LNG availability putting a lid on gas prices in North America or, alternatively, to what extent is additional shale gas supply in the US undermining demand for LNG. But we do know that LNG spot cargoes have been offered at par with domestic gas prices in the US for some time, giving much lower netbacks for producers than they might have been hoping for when they decided to invest in these megaprojects.
Although National Oil companies such as Qatar Petroleum, Sonatrach and Petronas continue to dominate the LNG business, oil Majors such as Royal Dutch Shell (NYSE:RDS.A, LON:RDSA) and ExxonMobil (and to a lesser extent BP and Total) have substantially increased their exposure to the sector. By 2020, Shell will be the 4th largest equity holder in the global LNG business and ExxonMobil (NYSE:XOM) the 5th. This represents an estimated industry-wide capital cost of $200 billion over the next 10 years, based rising capital cost intensities of new LNG projects. That’s according to an analysis by Evaluate Energy of future projects on a company by company basis. Ultimately the security of equity share the IOCs have in these projects depends on the stability of the local NOC and its government.
It’s not hard to see why the big IOCs piled into LNG. ExxonMobil’s latest Energy Outlook to 2030 says it all:
“Natural gas will be the fastest-growing major fuel source…the result of two factors. One is a steep rise in demand for fuel for power generation…, particularly in Non OECD countries. The second is a shift away from coal in order…
