New York September 17 2021: The current Asian LNG spot market and wider global gas market fundamentals set an interesting backdrop for Gastech 2021.
About a year ago, the conversation was dominated by concerns about demand destruction in the wake of the COVID-19 pandemic, billion-dollar write downs and capex cuts by oil majors and nearly a year of single-digit LNG prices.
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Since then, spot LNG has seen two of its largest price spikes, both dwarfing the post-Fukushima price surge when near-$20/MMBtu gas was considered a price shock. Asian LNG spot prices have surged past $20/MMBtu in September 2021, with the S&P Global Platts JKM for October delivery assessed at $25.075/MMBtu on Sept. 15.
The post-Fukushima LNG price was the peak of the classic commodity price cycle that triggered new supply side investments into new liquefaction projects from Australia to the US.
The monetary rewards of last winter's LNG trades, which reportedly created a windfall for many intermediaries, and the current price surge, will again reinvigorate gas producers to re-enter the supply chain, notwithstanding the ongoing debate around the decarbonization of natural gas.
LNG importers, on the other hand, are positioning themselves for a roller-coaster ride as prices of generation fuels have surged across the board.
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Demand destruction
In addition to the second-biggest JKM price spike since the assessment was launched in 2009, prices of competing fuels like coal are at a record high too.
The Platts Northeast Asia Thermal (NEAT) Coal Index hit an all-time record high of $146.67/mt on Sept. 15, after trading at less than half this level for most of 2020. In thermal units, Platts Northeast Asian coal prices crossed $6/MMBtu for the first time on Sept. 14.
In comparable terms, the price of 180 CST 2% sulfur fuel oil FOB Singapore was priced at a two-year high of $12/MMBtu on Sept 15, and the price of Minas crude FOB Indonesia was around $11.923/MMBtu, according to Platts data.
Still, competing fuels are still cheaper than LNG, and high LNG prices could deter new entrants to the LNG market in Southeast Asia, as well as new downstream consumption in China, India and the rest of south Asia. Signs of demand destruction in China have already emerged.
At $25/MMBtu JKM, while financing for new production is incentivized, the money flow into regasification, LNG-to-power projects and demand-side infrastructure like pipelines gets hampered, with emerging economies yet to see the light of day from the economic destruction wrought by COVID-19.
"S&P Global Platts Analytics expects spot LNG prices in Asia to remain well supported this winter amid a tighter global market. There is some evidence of demand destruction across various markets in Asia, but so far we haven't seen enough volumes to bring the market back to balance," according to Jeff Moore, manager for Asian LNG Analytics.
"Furthermore, it will likely take mild temperatures and normalization of European storage stocks to bring back significant downward pressure on prices," he said.
"The combination of lingering supply issues combined with the need to draw on supplies from outside Asia has supported JKM in 2021, and will continue to do so in the months ahead."
Energy transition, decarbonization
Gastech is also happening amid new market fundamentals -- record high carbon prices in Europe have contributed to coal-to-gas switching, driving up benchmark TTF prices to record levels, which in turn is supporting JKM.
The correlation in global gas prices, and record high derivatives volumes, underscore the rapid commoditization of LNG in the past year.
Japan, which drove LNG market development for decades, partly to expand the supply chain for its own energy security, is now under pressure to pull back from overseas natural gas projects, as part of efforts to cut back on fossil fuel investments.
Meanwhile, China has taken over the role of market driver.
S&P Global Platts Analytics expects China to become the world's largest LNG importer in 2021 on an annual basis, surpassing Japanese imports by nearly 10%. Total Chinese LNG imports are expected to grow by more than 20% in 2021 versus 2020 levels, Moore said.
In Australia, the hydrogen industry is on the cusp of energy transition, and roughly where the LNG industry was a couple of decades ago.
According to Australia's chief scientist, Alan Finkel, if Australia were to export as much energy in the form of hydrogen as it does in the form of LNG, it would need 880 GW of new build solar, covering just over 4,000 square miles.
"In Australian terms, that's about half the size of our biggest cattle station. So, yes, it's a big requirement, but we're used to thinking on that scale; and phased over 30 years, it's absolutely conceivable," he said at a conference this year.
At $25 JKM, there's little left to the imagination.
