Growing gas demand from Asia, particularly from China, could swing the liquefied natural gas (LNG) market into a deficit by 2022-2025, Fitch Ratings said in a note.
Market expectations of oversupply and weak gas prices have curtailed new investment activity in the sector in the past two years, it said, adding that limited capacity additions beyond 2020 should be positive for spot prices, especially in Asia and Europe.
“This will benefit LNG projects with significant un-contracted volumes and those linked to gas spot prices,” Fitch said
According to Fitch, an unprecedented wave of new projects becoming operational in 2016-2019 has not resulted in, and is unlikely to result in a material surplus in the LNG market in the medium term. Additional volumes continue to find a home across a diverse array of countries and new buyers, and under more flexible contracts.
The note pointed out that due to limited new final investment decisions (FIDs) very few new projects will come on stream in the early 2020s. FIDs in the next one to two years are likely to be limited to projects with lower capital and operating costs given constraints on the funding side.
“We expect gas demand to continue its robust growth in the coming years, mostly driven by Asian markets that account for two-thirds of overall LNG demand. This is due a combination of healthy power demand growth in the region, natural gas being the fossil fuel of choice in pursuit of curbing air pollution, and the backlash against nuclear energy,” Fitch said.
Japan is currently the largest LNG importer, but China is catching up quickly and becoming the major market for LNG.
According to Fitch, the natural gas market could shift into deficit by 2022-2025. Gas pricing is therefore likely to improve in the major importer markets, benefiting LNG projects relying on spot and hub pricing and entities with significant LNG trading portfolios.
“We also expect oil companies to gradually return to their earlier LNG ambitions. This includes oil majors, like Shell, BP and Total, most of which emphasise the growing role of gas in the global energy mix.” Fitch added.