Shaking up the LNG Scene

Background to the Workshop

KAPSARC’s Energy Workshop Series on natural gas started in March 2015. It aims at creating a collaborative space for discussion of the global trends and shifts in the global gas markets. The workshops bring together key stakeholders, including industry, consultants, policymakers, academics and financiers. This workshop is the third in the series and is largely dedicated to LNG markets. It also draws on the conclusions of the KAPSARC/OIES book LNG Markets in Transition: The Great Reconfiguration, which was published in September 2016 (Oxford University Press). Discussions were framed around future LNG markets, the uncertainties regarding future LNG supplies beyond the current LNG wave hitting gas markets and changes to the traditional LNG business model. Buyers and sellers are as far apart as they have ever been in terms of their aspirations and demands, leading some to question whether current price formation and contract mechanisms can emerge unscathed from the supply surge. Sellers claim that new projects cannot be sanctioned without the security of long-term, oil-indexed contracts. Buyers, facing significant demand uncertainties, are becoming more selective about the terms they accept.

Key Points

• Dramatic changes in the global liquified natural gas (LNG) markets are already visible through market dynamics and stakeholders’ behavior, but many other signs point to much more significant changes to come – a great reconfiguration, which could transform the way LNG is traded and have a farreaching impact on natural gas markets. 
• The structure, business models and market players in the LNG business are changing greatly, forcing existing players to be innovative to survive.
• Sellers and lenders need to accept that moving to more risky business areas will be necessary for gas to expand its role, notably by bringing electric power and industrialization to energy poor regions. 
• The gas industry tends to focus primarily on the power sector; it should also exploit its advantages by promoting gas use in the industrial and transportation sectors. Heat production and air quality improvement are two areas where gas has an advantage. 
• As buyers ask for more changes on pricing and supply flexibility, sellers are concerned that contract sanctity may be at risk. This could create major issues in convincing traditional lenders to finance LNG projects.