'Crumbling' Asian LNG Markets Could Hit North American Export Projects

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Asian LNG demand is buckling under historically high prices in a move that could be a gut punch for existing and planned North American export projects, particularly on the US Gulf Coast.

A study by the Institute for Energy Economics and Financial Analysis (Ieefa) shows Asian LNG demand in decline as soaring European demand pushes prices to levels many Asian countries cannot afford. And it cites International Energy Agency (IEA) findings that there will be 60% less demand growth through 2025 than in the previous five-year period.

“The LNG export industry has tended to view Asian markets as a massive pool of opportunity,” said Sam Reynolds, author of the Ieefa report The Economic Case for LNG in Asia Is Crumbling. “But unaffordable prices are causing the demand pool to dry up, undermining the viability of LNG as a cheap, reliable ‘bridge fuel’ for emerging Asian markets. High, volatile prices are alienating the same markets that the LNG industry was counting on for growth.”

Reynolds told Energy Intelligence that should global LNG prices remain elevated and volatile for the next several years, "downward pressures on Asian LNG demand are likely to accelerate, which may ultimately limit opportunities for term deals between North American exporters and emerging Asian importers over the long term."

'Investors Must Take Note'

Energy Intelligence calculates that prices in Northeast Asia have soared above $50 per million Btu from less than $18/MMBtu this time last year. As a result, Asian markets have pivoted from gas at a rapid pace, with LNG sales to Asia down 6% year over year, according to the IEA.

This could spell trouble for North American LNG exporters, who often tout that cheap supply costs will keep the sector competitive. In fact, Reynolds said operations on the US Gulf Coast may have higher break-evens for LNG deliveries to Asia than its chief competitors in Australia and the Middle East.

"Buyers look at many factors when deciding where to source their LNG,” Reynolds explained. “Mature Northeast Asian buyers have purchased US LNG for non-price factors, such as added diversity of supply and pricing models.”

Yet the cost of delivered cargoes is the top priority for emerging Asian markets, including Pakistan, Bangladesh, India and most critically China. “There, buyers are going to be hard-pressed to decide between US contracts — now increasingly tied to volatile Henry Hub prices, which are being driven higher by the ongoing LNG build-out on the Gulf — and oil-indexed contracts from Qatar and elsewhere,” Reynolds explained. “Higher transportation costs from the Gulf will likely factor into those decisions.”

The kicker is how quickly this came about. “Less than one year into higher prices, LNG markets are already seeing a major realignment of demand away from Asia," said Reynolds, an energy finance analyst with Ieefa. “Financiers and investors in new LNG projects must take note.”

Imports Down Sharply in 2022

No developing market is more important to North American LNG operators than China, where lost market potential will not fully recover as it develops new coal-fired power generation capacity.

Since the beginning of 2022, buyers have signed firm and preliminary deals for roughly 50 million tons per year (6.85 billion cubic feet per day) of offtake with US LNG developers or with Mexico-based projects exporting US gas via Mexico — with China utilities and end-users comprising a substantial share.

But there are already signs of declining demand in China. The country imported 4.74 million tons of LNG in July, a 15.4% drop from a year ago, according to latest customs data. That continued a seven-month fall so far this year, bringing China's LNG imports year to date to 35.93 million tons, down 20.3% from a year ago.

Moreover, year-over-year Chinese pipeline imports have risen 10.8% through July, customs data shows, and plans are in place to expand pipeline capacity from Russia and Turkmenistan by 100 billion cubic meters per year (9.5 Bcf/d), permanently eroding future need for LNG imports.

It has also given renewables a significant boost in China, with 120 gigawatts of renewable capacity set to be rolled out this year potentially displacing more than 2 Bcf/d of gas burns.

Unaffordable LNG prices have also led Asia's emerging markets led by China to slash spot market purchases while maximizing long-term contract volumes. That also helps explain why Chinese utilities have been at the forefront of new deals underpinning growth in the US LNG sector while US focus has been on slaking European demand.

US Model Pros & Cons

The predominant US contract structure — including the take-or-pay provisions and destination flexibility — gives US export projects an advantage, Reynolds said. “But there are also disadvantages to locking in a long-term contract for US LNG, including higher shipping costs from the Gulf of Mexico to Asia, the rising odds of high Henry Hub prices, and seasonal and weather-related interruptions — i.e., hurricane season — among them."

Should high prices and volatility persist in the global market over the next several years, he said, "downward pressures on Asian LNG demand are likely to accelerate, which may ultimately limit opportunities for term deals between North American exporters and emerging Asian importers over the long term. New LNG export projects in Mexico and British Columbia will be most exposed to a potential slowdown in the growth of LNG demand given their reliance on Asian buyers.”

Also, the ongoing LNG market upheaval demonstrates how rapidly supply/demand imbalances can develop, which can be a problem for projects with long timetables to production — such as LNG Canada in British Columbia and Energia Costa Azul in Mexico, which aren't expected to enter service until 2025 or possibly 2026. BC-based Woodfibre LNG wouldn’t be on line before 2027.

“Should developing Asian countries accelerate plans to limit LNG demand growth over the next three to four years, export projects in Canada and Mexico could be entering a much smaller demand pool, which could ultimately mean lower-than-anticipated prices, smaller netbacks and tighter margins,” Reynolds said. “Since Asian LNG demand may not grow as rapidly as investors expect, overdependence on Asian offtakers is proving to be an increasingly risky strategy for export projects.”

China's Gas Consumption
 Domestic Production (Bcm)Y-o-Y %Chg.Total Gas Imports (million tons)Y-o-Y %Chg.LNG Imports (million tons)Y-o-Y %Chg.Pipeline Gas Imports (million tons)Y-o-Y %Chg.

LNG Demand, LNG Forecasts, LNG Contracts
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