Could Improved Market Liquidity and Diverse Pricing Aid in Managing a Potential Worldwide LNG Surplus?
The global liquefied natural gas (LNG) market is gearing up for a significant transformation, with demand set to surge and supply expansions underway in key producing regions.
According to multiple sources, including the International Energy Agency (IEA) and Shell, global LNG demand is expected to grow by around 60% by 2040, driven primarily by economic expansion in Asia. This substantial increase is mirrored by substantial supply expansions, particularly from North America and Qatar.
North America is ramping up its LNG exports with projects like LNG Canada (14 mtpa by 2025), the US facilities at Plaquemines LNG and Corpus Christi LNG expansions, and the upcoming Golden Pass LNG facility. These projects are expected to significantly boost supply capacity. Qatar, on the other hand, plans to expand its North Field project to nearly double output to 142 mtpa by 2030, reinforcing its global supply role.
In the short term, US LNG exports are expected to rise notably, with exports increasing from 11.9 Bcf/d in 2024 to an expected 14.6 Bcf/d in 2025 and 16 Bcf/d by 2026. This increase in supply corresponds with forecasts of rising natural gas prices in the US Henry Hub market, with prices expected to rise by over 80% in 2025 compared to 2024.
As for the impact of pricing model changes on the LNG market balance, evolving pricing mechanisms could influence the competitiveness and flexibility of LNG supply. Traditionally, LNG contracts have featured oil-indexed pricing, often rigid and linked to long-term contracts. However, increasing adoption of hub-based pricing (linked to spot market prices like Henry Hub or regional gas hubs) and more flexible contract terms can provide better market responsiveness and arbitrage opportunities.
More dynamic pricing could encourage more efficient allocation of LNG cargoes, potentially smoothing out demand-supply imbalances and reducing market volatility. However, shifts in pricing models could also raise concerns over price volatility for buyers, influencing contract structures and investment decisions.
Notable developments include Saudi Aramco's acquisition of a 49% stake in the LNG company MidOcean Energy and the Saudi Arabian oil company's 20-year deal with U.S. firm NextDecade to buy 1.2 million tons of LNG per year. This deal gives the Saudis the option to sell the LNG globally or bring it home.
The market is observing such shifts by major energy sector players, with the International Energy Agency predicting that Europe's uncontracted LNG demand will increase by around 40% over 2023 to 2030. LNG demand is also moving eastward, particularly towards the big four Asian powerhouses: China, India, Japan, and South Korea. These countries remain interested and invested in LNG as part of their energy transition and lower emissions strategy.
Investment bank JPMorgan describes the approaching LNG market as "structurally oversupplied." However, project delays and sanctions have the potential to decrease any anticipated level of oversupply in the LNG market. Additionally, less than a third of the expected demand increase from Asia between now and 2030 is covered by contracts, indicating a potential growth opportunity for LNG suppliers.
In the face of these changes, the global LNG market is expected to become more diverse in pricing models and liquidity, making a lasting difference in the market's dynamics. Stakeholders will need to navigate these changes carefully to ensure a balanced and stable market.
[1] International Energy Agency (IEA), World Energy Outlook 2021 [2] JPMorgan, Global LNG Outlook 2022 [3] Shell, Sky Scenario 2021 [4] U.S. Energy Information Administration (EIA), Annual Energy Outlook 2022 [5] U.S. Energy Information Administration (EIA), Short-Term Energy Outlook, March 2023
- The global LNG market, characterized by its upcoming transformations, is attracting significant attention from the industry, finance, energy, and business sectors, as the world's largest LNG producers like North America and Qatar are expanding their output in an attempt to meet the projected 60% increase in global LNG demand by 2040.
- As the global LNG market becomes more diverse in pricing models and liquidity, policymakers, investors, and market participants will need to navigate these changes with care, ensuring a balanced and stable market, while also capitalizing on opportunities offered by evolving pricing mechanisms and growing demand from key players in the Asia Pacific region.
