Asia is the largest market for LNG and the Asian continent is projected to represent 75% of the global LNG market by the end of the decade. Asian demand is driving LNG prices to record levels, much to the delight of LNG ship operators, and casting doubt on Europe’s energy security.
LNG shipping rates in Asia-Pacific have reached record highs. The growth in demand for LNG in Asia is considered one of the major contributing factors in the development of the global gas industry. Although the availability of gas carriers in the market has improved, the winter season in Asia is likely to step up demand for LNG.
Expensive, more expensive, most expensive
Spot rates for gas carrier freight in the Asia-Pacific region have reached all-time record levels due to rising demand for LNG and increased gas supplies from the United States to Asia.
According to Spark Commodities, the spot price for LNG carriers in the Pacific region in December skyrocketed to a whopping $300,000 per day. This broke last winter’s record for LNG spot rates when a harsh winter in Asia pushed LNG prices and freight rates to record highs.
South Korea’s Korea Gas Corp (KOGAS) has bought four to six LNG shipments for January-February 2022, Turkey’s state-owned energy company BOTAŞ Petroleum Pipeline Corporation (BOTAS) is looking at five shipments to be delivered in January and February. China’s National Offshore Oil Corporation (CNOOC), which produces oil and gas, is seeking to obtain 10 shipments for March-December 2022, while India’s H-Energy, which deals in natural gas, is seeking eight LNG shipments per year with delivery to be delivered over the next four years, starting next April.
Many companies have already ordered winter shipments and are unlikely to need further volumes unless there is a sudden wave of very cold weather, which is not impossible.
LNG supplies continue to soar
McKinesey reports that LNG supplies in Q1-Q3 2021 increased by 15.8 MT (6 per cent) compared to Q1-Q3 2020. The large increase in supply comes mainly from the United States (+21.6 MT or 66 per cent) and Australia (+1.9 MT or 3 per cent).
On a quarterly basis, total supply in Q3 is lower by 3.7 MT compared to Q2 due to maintenance work in Russia and supply disruptions.
In terms of LNG demand, China continues to dominate the growth in imports, which increased by 22 per cent between Q1 and Q3 compared to the same period in 2020. (+10.5 MT).
Imports from the rest of Asia increased slightly by 2 per cent (+0.7 MT) between Q1 and Q3 2021, as high gas prices led to some delays or cargo cancellations. European LNG imports fell by 19 per cent (-12.5 MT) over the same period.
Europe may be in trouble
From January to early November this year, LNG supplies to the European market fell by almost a quarter compared to the previous two years. In turn, almost all of the LNG on the spot market was shipped to Asia, where prices were very high, allowing Atlantic Basin suppliers to more than compensate for the additional transportation costs.
The main reason for the LNG deficit on the European market was the price. American companies rightly prefer to send LNG to where their profit margin is higher, and this year it was the Asian markets.
With this situation in mind, we may see new strategic decisions being made to develop the European energy market in favour of renewable energy sources. This is a direct threat to the future of Russian natural gas exports.
Moreover, most of the available gas carriers on the spot market come from large LNG importers, as shipowners have preventively chartered their vessels for the winter.
The economic demand and pro-gas policies of Asian countries are resulting in an increasing demand for LNG.
As LNG is a low-carbon resource, environmentally conscious Asian buyers are keen to invest in the development of the LNG sector. The growing emphasis in Asia on greener LNG means that more and more Asian buyers will expect suppliers to provide data on the carbon emissions associated with transporting cargo.
Current record LNG prices reveal a number of issues in the global market.
In recent years, decisions to invest in LNG have been made in the absence of long-term contracts that guarantee the availability of gas. Risks that may be acceptable to companies are not acceptable to governments, which prioritise the need to provide heat and electricity to their people. If a company gets its LNG calculations wrong, only shareholders suffer, while if there are problems with energy imports to a country, the consequences could be much more serious.
Another likely consequence is that Europe will become more serious about securing the hydrocarbon supplies needed to make the transition to renewables, and competition between suppliers for the still attractive European market will intensify accordingly. Europe will not be able to ignore the need for predictable, long-term contracts, even if it continues to choose suppliers based not only on business but also on political criteria.
The production capacity of the world’s shipyards may not be sufficient to meet the soaring demand for LNG carriers on an ongoing basis. The increase in demand will require the construction of many more gas carriers, which makes this segment of the shipbuilding industry promising in the long term, while each new year reinforces the industry’s good prospects.