LNG price variability is set to continue but as the market of gas become more fungible markets are expected to become efficient, a study by global law firm Ashurst reveals.
The study, which sourced the views of general counsel and executives across exploration, production and offtake customers in Asia Pacific, found that the industry is predicting that LNG trading will continue to mature, with the growth of short term contracts and an increasingly deeper spot market.
The LNG market was, until recently, regarded as relatively stable. LNG was traditionally sold by producers and purchased by end users or utilities on a point to point basis under long term contracts, with pricing linked to oil and sometimes subject to price market review. The market is evolving substantially as more countries develop their infrastructure and more players become involved. The firm predicts gas market maturity and depth which will bring efficient and a further commoditised market.
The study, “The Future of LNG and Natural Gas Infrastructure”, compiled the views of general counsel and executives across exploration, production, offtake customers and investors in the Asia Pacific region. The study indicates non-traditional investors, including cashed-up infrastructure funds, are set to eye off LNG plants and associated facilities as an attractive investment.
Beyond current COVID-19 challenges and the oil over-supply price shock, the findings in the report point to a buoyant outlook for the natural gas and LNG sector in the Asia-Pacific region for many years.
The report found 60 per cent of LNG industry leaders see varying degrees of disaggregation occurring across the industry in the next 5 to 10 years and three quarters expect a greater number of floating regasification facilities to enter the market. A common theme among respondents was that a price on carbon would provide greater certainty to investment planning.
While there may be challenges to overcome as the Asia-Pacific LNG and natural gas sector evolves, there is consensus that opportunities will be available to incumbents and new entrants alike if they are match-fit for the future.
Based on the survey, there is a strong medium-term future for LNG investment in the Asia-Pacific region, especially on the regasification side but also in bringing untapped upstream resources through liquefaction, particularly for brownfield or back-filling opportunities. Many industry players expect to see a redefining of the commercial models and ownership structures that traditionally underpin the sector – on both the production and consumption sides.
Ashurst’s Singapore-based LNG and upstream natural gas partner, Daniel Reinbott, explained: “With a clear line of sight to a natural gas and renewables electrical power generation mix, there is optimism for the natural gas and LNG sector in the Asia-Pacific region.”
“LNG and natural gas will play an important role in the energy transition. It has a role as a transitional fuel as well as a longer term role to complement renewables as a large-scale solution addressing the intermittent nature of solar and wind, “ Mr Reinbott said.
“As more countries develop their natural gas infrastructure, either on the buy or sell side, the LNG and natural gas market is expected to deepen with more players becoming involved and sales contracts shortening.”
“Everywhere we look, the energy transition is impacting decisions. In the minds of our clients in the LNG business, the energy transition is here, it’s real. It’s just a matter of how they can be in a position to capitalise on the opportunities of an energy system driven by the transition to lower greenhouse gas emissions and long-term demand growth.”
The report predicts key players in the market will be divided between “masters” and “maestros”.
“Masters will be characterised by their desire to broaden and deepen their influence and control across the entire energy value chain. These will generally be the bigger IOCs and NOCs with long term plans to survive beyond the fossil fuel age, and their own global reputations to protect, or mandates to deliver such as emissions reductions or energy transformation,” Mr Reinbott said.
“Maestros will carve out niches, based on their specialisation, such as the relatively small pool of existing LNG floating regasification vessel owners and operators which are set to see an uplift.”
76 per cent of LNG executives surveyed said floating regasification was highly likely to expand, recognising the flexibility, smaller footprint and shorter lead-time of floating regasification as a real advantage.
Across the board, it is recognised that the bigger energy players are broadening their reach through the energy sector. Survey respondents cited the “electrification” of the global energy system – driven by the uptake of renewables – as another force for change.
“As energy companies shift from being suppliers of molecules to suppliers of electrons, they are becoming increasingly agnostic about where that energy comes from,” Mr Reinbott said. “And so while gas and LNG will be critical for energy security for many decades to come, as renewables increase their penetration, investment from energy companies will follow.
Ashurst also noted that merger and acquisition activity was expected to increase with participation likely from incumbents and new entrants to the traditional IOC market.