LNG Bunkers – Troubled waters

The LNG Bunker market has established itself in Europe and the USA, spurred by the new ECA constrictions, but uptake has been slower than hoped for. This 4th annual issue of LNG Bunkers Perspective suggests three reasons apparently prevail.

The dramatic fall in oil prices, triggered by sluggish demand and an expanding supply, due in part to the surge in US shale oil and gas, has led to oversupply. But this will re-balance and faster than many expect. The slowdown in China is being addressed by a monetary stimulus initiative that will restore demand. OPEC’s decision not to tighten oil supply may, in part, be an attempt to undermine the shale advance. This will not work. The USA today is the world’s largest energy producer and is predicted to be a major exporter by 2020. Meanwhile, burgeoning population growth in the Middle East, combined with higher living standards expectations, could see Saudi Arabia become a net energy importer by 2030. The current price-inspired delay, or postponement in FID on gas projects could lead to tightening of gas supply and shortages from 2019/20.

The “Chicken and Egg” syndrome, where ships are chasing LNG bunker ports and vice versa, remains a challenge. But, there is a big difference in approach either side of the Atlantic to addressing this. In the USA, private enterprise is picking up the baton based on specific opportunities and specific routes. But there is little general port development. Meanwhile, the European Commission’s Trans European Transport Network (TEN-T) programme calls for all major European seaports to offer LNG bunkers by 2020 and inland waterway ports by 2025, providing significant funding already towards this end.

The current mix of LNG bunkering codes and regulations is diverse, sometimes contradictory and involves too many parties and authorities. This has proven to be frustrating and time-consuming for LNG aspirants on both sides of the Atlantic. The reason that large aircraft are able to refuel across the world is that they conform to international standards. Such international conformity, co-ordination and co-operation is needed urgently in the LNG bunkering world.

THE LOW PRICE MIRAGE

Much has appeared in recent media reports about the prospect of a world returning to cheap energy. This is misguided and naïve. Investment decisions based on this premise, are both myopic and are the harbinger of future problems.

Future gas demand will outpace oil demand growth by more than double year on year, with annual gas demand, currently around 3,500 billion cubic feet (bcf) and rising to 4,500 bcf by 2025 and over 5,000 bcf by 2035. Cutbacks in future supply, based on decisions made now, will see tightening in gas markets starting from 2019/20.

Energy prices linked to an oil price of $40/bbl mean that half the world’s current oil production is sold at below full cost, clearly unsustainable in the long term, except for the few.

More significantly, the oil producers, needing high prices to balance their books, listed adjacent, have growing populations, with the possible exception of Russia. The Saudi Arabian population is growing around 1.9% pa and Iran 1.3% pa. But energy demand is not proportional. After the “Arab Spring”, people in the Middle East expect and demand a higher standard of living, with fridges, air conditioning, washing machines etc., so energy demand growth runs exponential to population growth. With maturity in the traditional oil fields, the oil price needed to sustain these oil-dependent economies can only rise.

Low prices have also stimulated demand. The International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) have raised by at least 200,000 barrels per day (bpd) their estimates of demand for OPEC crude in 2015

The biggest card in the game, China, has not stood by idly watching its economic growth stagnate. In January 2015, the China Central Bank introduced a programme of quantitative easing, injecting 1 trillion Yuan ($162 billion) into its economy to stimulate new growth. With an increasing public clamour to deal with catastrophic air pollution, we can also expect to see the Chinese energy mix shifting and demand for gas rising at the expense of coal and oil. And Japan, still predominantly in a post-Fukushima nuclear shutdown, is beginning to see its fortunes rise after a decade of slump, boosting gas demand.

Source: Tri-Zen