Low Supply Costs Key To Success In Emerging LNG Export Markets: New Evaluate Energy Analysis
Asia-Pacific gas demand is forecast to grow by at least 50 per cent by 2040, but only the lowest cost LNG suppliers will win a piece of this demand, according to a just released Evaluate Energy Briefing Note: Linking North American LNG Supply to Asia-Pacific Markets.
Because Asia-Pacific countries have sustained demand, they want to enter or renew long-term contracts to ensure lower cost supply, rather than taking the European approach of shorter-term contracts or relying on spot cargoes from portfolio players.
As of 2023, 146 long-term contracts, covering 195 mtpa of volume, exist in Asia. These totals will drop to 96 contracts and 146 mtpa by 2030.
“This will create an interesting moment for pricing as Qatari, U.S., Australian and Canadian capacity comes online during this period,” said Tom Young, author of the Briefing Note. “Qatari and Australian sellers seem committed to oil indexation, despite the increasing disconnection between oil and gas markets. Asian buyers will want the cheapest prices possible, and to avoid getting caught in a repeat of the scramble for expensive spot cargoes that took place in 2022.”
One recent bellwether is the deal signed between QatarEnergy and Sinopec, said Young. The 27-year deal is for 4 mtpa, one of the longest contract durations in the sector.
There are other price-sensitive buyers in Asia that are likely to become increasingly significant LNG importers, including India, Vietnam and Bangladesh.
“Traditionally India has been an opportunistic buyer, only willing to enter the market at US$10/mmBtu or below,” said Young.
While industrial demand provides a base for LNG imports in Asia, the power market will provide most growth going forward. LNG exports must be competitive with other energy sources including coal and renewables. The analyst consensus is LNG is competitive in emerging markets at under US$10/mmBtu.
Suppliers like Canada will compete on cost
LNG supply costs depend on facility capital costs, upstream gas supply costs, midstream liquefaction costs, and transportation costs. Most exporters are advantaged or disadvantaged in at least some of these areas.
“For example, Canada has higher upfront costs than a comparable facility on the U.S. Gulf Coast. It also has significantly higher upstream transportation costs to pipe gas to liquefaction facilities,” said Young. “However, Canada’s liquefaction costs are lower due to its cold climate, and it also has a geographic advantage in reaching Asian markets (see graph below).”
A recent Canadian Energy Centre study shows Canada in the middle of the pack when it comes to upstream natural gas supply costs. The Canadian natural gas sector had a weighted average breakeven gas price of US$2.31/mcf in 2022, fifth lowest among major natural gas producing countries, behind Saudi Arabia ($1.09/mcf), Iran ($1.39/mcf), Qatar ($1.93/mcf) and the United States ($2.22/mcf).
However, the Montney play where LNG supply will be sourced had a breakeven price of $1.49/mcf, lower than the largest LNG exporters in the world — Qatar and the U.S.