The LNG industry has been growing during the last years, and the pandemic has even accelerated this growth. Several factors are influencing this trend:
- Low natural gas prices (mainly due to the oversupply caused by American fracking).
- Lower emissions from production and combustion than other fossil fuels.
- Regulations to diminish/eliminate the use of coal (used to generate electricity, natural gas will act as a substitute)
This trend is set to continue for the next 10-20 years as natural gas will play an important role in the energy transition, acting as a bridge fuel for power generation between coal and renewables.
These factors are affecting differently to the players along the LNG value chain:
Upstream – In the case of producers, the increment of competitors among gas supply sources has raised the supply of natural gas to the market and erode margins, putting pressure on gas producers. This is one of the main consequences of fracking, and it is difficult to think that the trend is going to reverse in the future. The more technology and resources we have, the cheaper is to obtain natural gas, consequently, there is more supply in the market and lower prices.
Liquefaction – As a consequence of the fracking (increment of supply) and the low prices of natural gas (an increase of demand), the number of Mtpa of liquefaction capacity has raised sharply. The US has become a net exporter (there is a boom in the construction of liquefaction in the US) and the demand in Asia has rocketed. Moreover, Qatar is expanding its liquefaction facilities and there are a bunch of other liquefaction plats projected across the world. Nevertheless, the pandemic has stopped some projects and delayed others. These types of projects are highly capital intensive, companies related to it need deep pockets, and a significant part of the projects will die before even starting. Tellurian can be an example of this.
Shipping – the main driver for the shipping industry is the number of vessels (supply) and liquefaction capacity (demand). Currently, there is a higher number of vessels on order than liquefaction capacity being built. Therefore, it is expected to be a tough market for the coming years (2020-2022). After that, as the number of orders now it is at its historic minimum level, it is expected to be a good market for shipping during the 2023-2025 period.
Downstream accounts for the regasification of the LNG and the generation of power. Obviously, this part of the value chain is benefited when natural gas prices are low, which is what is happening in 2020. There is a huge amount of FRSU projects (floating regasification units) and import terminals ongoing. However, because of Covid-19, the vast majority of them has been delayed and they will start to be operative in 2H21-2022
My point of view is that LNG is an interesting industry for the next 10-20 years as it is growing considerably, and it has the climate change in favour. I do not say that LNG is clean energy, but it is much cleaner than its direct competitors, and we still need 10-20 years to rely on renewable energy/hydrogen because of the need of batteries. Moreover, the main focus of LNG will be emerging markets, where natural gas will substitute oil and coal to produce electricity.
It is important to note that different forces are affecting upstream, midstream and downstream. At this moment, the only one that it is interesting is downstream, as upstream is very affected by the low prices and midstream by the high number of vessels set to arrive at the market in the coming 24 months.