The outlook for the global LNG market is bright, spurred by healthy underlying gas demand, improved competitiveness against piped gas, and rising investment in infrastructure. Spiralling prices seen in the wake of the Ukraine war are not sustainable, squeezing the more price-sensitive buyers out of the market. However, a new equilibrium will be reached, with prices softening over 2023 and 2024.
The return of European buyers en masse to the market has fundamentally altered global trade dynamics, with strong demand and favourable regional price differentials pulling cargoes from east to west. Competition with Asian buyers will remain fierce over the coming years, with a tight market balance and elevated LNG prices incentivising investment in new sources of supply. Russia has left a wide deficit to plug, bolstering the prospects for the large backlog of projects currently sitting in the pre-final investment decision (FID) pipeline.
Russia’s invasion of Ukraine was a shock to the market, forcing rapid adjustments on the demand side. A steep drop in European consumption proved insufficient to fully offset the precipitous decline in piped gas from Russia. LNG has been the balancing factor, with imports on track to rise by more than 70% this year, met by new project additions and cargo diversions from Asia. In contrast, Asian LNG imports have fallen by approximately 8% in the year-to-date, with volumes depressed by weak economic activity in mainland China, mild weather conditions, and price-related demand destruction. Rapidly rising gas stocks in Europe and seasonally soft demand has seen a reversal in LNG flows over recent weeks and a decline in prices. However, markets will tighten once again over the Winter months, and the 2023 global market balance looks extremely narrow amid stunted greenfield supply growth and heightened competition between European and Asian buyers.
Over the long term, the outlook for European gas demand is relatively bearish, as deeper decarbonisation strategies encourage higher energy efficiency and an accelerated shift to low-carbon fuels. However, even allowing for these expected declines in demand, Fitch Solutions estimates that over 70 million tpy of additional LNG supplies will be required in order to compensate for the loss of piped Russian gas. EU governments have been scrambling to build out adequate infrastructure to accommodate this influx of LNG, with approximately 145 million tpy of regasification projects now in the planning or development stages in the region. Germany alone accounts for approximately 65 million tpy, although this includes both FSRUs (for short-term deployment) and the onshore terminals that are expected to replace them in the long run.
For demand, though, Asia remains king. Based on the existing project pipeline, Fitch Solutions currently forecast net regasification additions of approximately 170 million tpy over its 10-year forecast period, nearly double that for Europe (90 million tpy). Whereas European demand will be driven by gas-on-gas competition and the replacement of pipeline supplies from Russia, Asian demand is a function of strong underlying energy consumption growth, a rising role for gas as part of the region’s broader decarbonisation strategies and, in some markets, a steep drop in domestic gas production.
Demand among the traditional developed market importers (Japan and Korea) looks relatively poor, weighed down by more muted economic outlooks and rising energy efficiency and competition from nuclear and renewables. However, a state-led push to replace pipeline supplies in Singapore and strong policy support for gas amid a phase out of nuclear power generation in Taiwan and coal in Hong Kong buoys the region’s outlook overall.
Mainland China is set for healthy gas import growth, as Beijing accelerates the shift from coal to gas in the domestic energy mix, fed by a rapid build-out of LNG import and pipeline infrastructure and rising domestic output. Over time, increasing flexibility in the country’s various sources of gas supply could allow it to play the type of balancing role for the global LNG market that it has played in 2022. The size of the domestic demand pool and its increased ability to swing supplies between markets will see mainland China remain central to the global LNG sector over the coming decade. However, strong potential growth in piped gas supplies from Central Asia and Russia, upside risk to domestic output, and uncertainties on the demand side could see LNG import growth disappoint consensus expectations.
Developing markets in Asia in general, though, look set for a rapid rise in LNG imports. Growth is increasingly well-diversified, although India emerges as a clear leader in volume terms. Strong underlying economic and demographic trends, rising policy support for gas, limited domestic gas supplies, and a lack of pipeline alternatives all paint a bullish picture for LNG demand in the region. That said, the resurgence of European LNG demand poses some risk to the outlook. Many of these buyers are relatively price sensitive and have been effectively priced out of the spot market this year. While these price pressures will ease considerably over the coming years, infrastructural limitations may arise in their place. Many of the regasification projects currently in the pipeline are floating terminals, but European buyers have now scrambled to secure much of the available FSRU fleet. These projects had already faced a number of idiosyncratic barriers to progress and are now at heightened risk of cancellation or further delay.
