The LNG seesaw is out of whack

In part 2 of this series, I have described the events that have led to the situation we are in now. 

Oversupply.

Oh no, I am really downplaying things now. It’s not way more than simple oversupply. 

This is the mightiest, most impressive, most crushing wave of uncommitted LNG this planet has ever faced. And it’s still growing. There were successive waves of new projects each amplifying an already monstrous situation.

Why is that? Why has the market gotten so out of whack?

One would be forgiven for believing that markets should have a simple self-regulating mechanism. 

Low supply produces high prices. This will incentivize new production until the market gets oversupplied. Too much of a good thing will depress prices. This will – in turn – suppress further production which in turn will cut back on supply. 

In different words and as a list it comes as follows:

• Low supply generates high prices
• High prices drive investment into new supply ventures
• New supply will eventually lower prices
• Lower prices will inhibit investment in new supply

And so it goes in a never-ending virtuous, self-regulating cycle. Right?

Wrong.

Because we discount human greed and short-sightedness from this virtuous cycle. And this human greed needs one thing more than ever. Always newer, greener pastures they can dangle in front of those eager to make a quick buck.

The LNG market should have started to correct around 2010. Back then the shale revolution had wiped out the biggest price ever. The North American gas market had turned. For years it was to become a monster consumer of LNG and all of a sudden it had too much gas. That alone would have sufficed to produce the biggest hiccup in LNG history.

But Fukushima not only prevented corrective measures and market re-calibration. It injected even more madness into the equation. This resulted in further investment decisions. And those would not have passed scrutiny without the lure of the Asian madness. 

We must be honest here. Any corrective applied to a market eventually results in pain. Projects fail, companies will have to impair investments and traders will fail to make the cuts they expected. Jobs are lost and most importantly bonuses won’t be paid out.

How convenient when there is a White Swan event that takes all that potential pain away and provides fodder for more of the same.

But the post-Fukushima bubble was just that – a mirage. Japan brought back some of the nukes and brought in more coal. 

It happened one more time with the China boondoggle. Once again, a fresh wave of new projects got the green light. Another round of bonuses got paid out. And once more, extra LNG is going to hit the already oversupplied market.

What’s next? Where is the next White Swan going to come from? We had a whole series of ducklings along the way. 

Egypt transformed from an LNG exporter into an LNG importer and now back into an exporter. Argentina was on the radar for imports and all of a sudden it became an exporter as well. Pakistan is far below expectations. And a whole series of other fresh hype markets don’t consume LNG at the levels needed to soak up the excesses.

Far from anything needed. The LNG world needs a new consumer the size of China. This imaginary consumer needs to exhibit the will to gasify at a breakneck pace and pay any price to do so. We wanted to believe that clean air does not have a price for China. We deluded ourselves into the idea that China’s leadership would do whatever it takes to make China’s air breathable again. 

But now China seeks to reroute LNG cargos under long-term contracts away from China to get rid of their own overhang. They talk to European partners to sink the cargo there. Japanese players have opened offices in Europe some time ago. Again with the aim of trading cargos away. Not for making trading revenues. 

We learn that everything has a price and that LNG is not the ultima ratio for China. Neither is it for any other importer of primary energy. They will go for LNG as long as prices are comparatively low but as soon as prices start to rise, they will go for the cheaper alternative. Coal.

That’s a pretty horrible situation for LNG. There are no political sweet deals available anymore. Or not enough of them.

The kind of deals they had in the past. The kind of deals LNG developers were so good at. Wining and dining leaders of countries at banquets and grandiose events. 

That was when a country decided it wanted gas and would pay for it. That was at a time when there was no short-term market to speak of. No competition to speak of. Today, LNG gets gamed and the players in the LNG world have only themselves to blame.

But LNG also is not a monolith. It’s hard to blame today’s industry for what happened in the past. You cannot blame a manager for using whatever lever at his disposal to get his project going. And if there is a new shiny market potential on the horizon that will help him get FID, he would be a fool not to use it.

Leaves the question for today’s managers. How about now? Is anything that seems to bling really gold?

Because blanket approval of everything with LNG printed all over seems to go away. The current situation leaves a stale taste in many people’s mouths. They have lost money and they don’t want to go that route again.

But LNG seems to be still fixated on those bling-bling shiny new markets. Two years ago I met a project developer from the US and asked him why I never see him in Europe. He said that Europe is irrelevant because they don’t pay the prices he needs.

But what if the whole world does not pay the prices he needs? Right, then there won’t be many LNG projects anymore. At least not for many years.

Has that rationale worked in the past? Not really. The White Swans prevented that.

Now, politics has joined in. Russia has taken FID on LNG projects that I did not believe would happen. They were still enamored with the idea that the LNG market would go back to its old high-price days. And, there sure was a good deal of Russian grandstanding involved. Feels good to be in the big boys LNG exporter club. 

Qatar has announced that it will almost double its capacity. And when the formerly biggest LNG producer on Earth says so, I am inclined to believe they will do just that. 

Plus there are all those US-based hopefuls and Mozambique, and…

The madness will go on.

And it will take new markets to bring back balance to the LNG world. Real markets, markets that will stand that test of time and volume. 

Make no mistake – the old world is gone. It won’t come back. Bringing back balance means that the pendulum swing needs a commensurate reaction. One that works for once. One that is capable of absorbing what we have.

But that in itself will fling Pandora’s box wider open. Are we ready for that?

Then again, it’s not like we had a choice.