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Commodities

Surging LNG supply upsetting market balance

Global output seen soaring by 100m tons by 2020

Fatih Birol, executive director of the International Energy Agency, spoke at a recent Tokyo conference on the global LNG market.

TOKYO -- The balance of power in the global liquefied natural gas market is tipping more toward buyers as new production facilities are expected to begin operating soon. Producers are worried, but do not seem to have any immediate solutions.

The second natural gas revolution is underway, Fatih Birol, executive director of the International Energy Agency, told energy ministers from various countries during the LNG Producer-Consumer Conference in Tokyo on Nov. 24.

As LNG projects come onstream one after another in the U.S., Australia and elsewhere, worldwide output is expected to shoot up by roughly 100 million tons by 2020. This figure is equivalent to about 40% of the entire volume traded in 2015.

Birol defined the shale gas revolution in the U.S. in the 2000s as the first natural gas revolution. As that nation's natural gas output has surged, the use of it for power generation surpassed that of coal in the January-June half of this year, a situation that some are calling the fuel's "golden age."

However, a spike in supply volume only leads to an overabundance unless demand catches up.

"The golden age of natural gas that some predicted several years ago has not arrived, except for North America," said Masakazu Toyoda, chairman of the Institute of Energy Economics, Japan.

Qatar's energy minister, Mohammed bin Saleh al-Sada, said the LNG market is feeling the effects of a glut.

As new projects kick off, the oversupply is only going to worsen. The most logical outcome will be lower natural gas prices.

Some expected China's natural gas consumption to rise, but coal reigns supreme there due to its cheaper price. The country's LNG imports actually fell in 2015, according to estimates, the first annual drop since the country began buying it overseas in 2006. In India and the Association of Southeast Asian Nations, where demand for electricity continues to grow, coal is winning out as a power source.

Producers getting anxious

In the LNG market, the glut has resulted in fewer long-term contracts and more short-term ones. Buyers want more flexibility in setting purchase volumes and other conditions, an official at Japanese trading house Mitsui & Co. explained.

Unsurprisingly, gas producers are growing alarmed.

Unless producers have sufficient long-term contracts that make them confident about recouping their investment down the line, they are not in a position to build new plants, warned Peter Coleman, CEO of Australia's Woodside Petroleum.

Stagnant prices and demand, coupled with an onslaught of new production sites, may hinder the investment necessary for natural resource development, al-Sada cautioned.

A lack of investment could create not only supply shortage risks but also hurdles in the fight against climate change by boosting the use of coal. A sweet spot for LNG prices that does not diminish consumption but is still high enough to encourage producers to invest for the future will be key to the success of the second LNG revolution.

(Nikkei)

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