By Sonny Atumah

Since the international market for liquefied natural gas, LNG got oversupplied about five years ago the resultant glut is yet to abate. The United States Energy Information Administration, EIA reports that working natural gas stocks (underground storage) as of Friday, March 31, 2017 was 2,051 billion cubic feet, Bcf. It represents a net increase of 2 Bcf from the previous week. Stocks were 427 (17 percent) less than last year at this time and 265 (17 percent) above the five-year (2012-16) average of 1,786 Bcf for this week.

However natural gas spot prices in the Henry Hub spot price rose from US$3.03 per million British thermal units, MMBtu on Wednesday, April 5 to US$3.21 per MMBtu last Wednesday, April 12. It has indeed been an unstable market that pummels continually. From the International Gas Union, IGU 2016 Reports the prospect of inadequate margins on oil linked LNG sales will give developers further pause until greater certainty is established over long-term price expectations.

Despite lower LNG term and spot prices, global LNG output from legacy producers: Qatar, Malaysia Russia and Nigeria remained particularly strong with Gorgon’s Chevron Australia and Papua New Guinea contributing substantial new volumes. In response to downward prices, legacy assets many of which are partially depreciated, have low breakeven costs but maintained high utilization.

A major challenge to future projects development is the looming supply from Australia and the United States set to come online in the next five years. With 141.5 MTPA under construction and announced to come online before 2020, LNG supply is expected to expand considerably during this period making it more difficult for project developers to secure commitments for long term buyers. The inability to secure buyers has been a major impediment to the development of many LNG projects. If this trend continues proposed projects may find it difficult to secure established and credit worthy buyers.

Again the unhealthy rivalry between and among world superpowers who jostle to increase liquefaction capacities is compounding the precarious situation with prices likely to further down. Both countries are investing in liquefaction facilities even with capped LNG prices that may not improve until 2020. Proposed activity slowed down considerably in 2015 as a result of market oversupply and demand uncertainty in key import markets.

Russia is investing in the Yamal LNG project in the arctic to compete with leading global LNG exporting leaders, Qatar and Australia. Late March 2017, Russian President Vladimir Putin, expressed his country’s determination to become the world’s biggest LNG producer. The US and EU imposed sanctions however had slowed it down. The United States natural gas exports are expected to increase with additional capacity coming online at Chenniere’s Sabine Pass LNG liquefaction plant in Louisiana, the expected start of Cove Point LNG in Maryland in December 2017 and new projects at Cameron LNG and Freeport LNG on the Gulf Coast in 2018.

Major LNG importers from Asia: Japan, South Korea and China which have had shrewd assessment of the situation cashed in on the opportunity to negotiate more flexible deals and concessions from exporters. The three-member group, which accounts for one-third of global LNG imports constituted themselves into a cartel to subdue prices. With the price of LNG determined by the forces of demand and supply, they influence favourable global supply contracts for its members. The club is causing significant changes in pricing, demand and supply imbalances, risks and uncertainties, for a new order LNG business.

The club members share information and cooperate in procuring LNG jointly. Destination restrictions until now made it impossible for LNG buyers to sell excess supplies bought in fixed volumes as part of long term contracts. It is now possible for the three club members to trade with one another based on demand to resell imports to third parties in flexible supply terms. Winter supplies can now be bought by the Korea Gas Corporation, KOGAS; while China National Offshore Oil Corporation, CNOOC buys supplies for summer. The JERA Corporation of Japan which is the global largest buyer of LNG in partnership with Chubu Electric Power and Tokyo Electric Power buys supplies for winter and summer.

Indeed, the 12-member Gas Exporting Countries Forum, GECF itself a cartel has a challenge posed by this emerging importers club on how to remain competitive in LNG business. The GECF members are Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Qatar, Russia, Trinidad and Tobago, United Arab Emirates and Venezuela. The world’s nominal liquefaction capacity is held by five countries: Qatar, Indonesia, Australia, Malaysia and Nigeria. Qatar alone holds 25 percent of the total capacity.

Observers believe that the buyers’ club formed in March 2017 and hold all the aces is an aberration because a cartel ordinarily is an alliance of business companies formed to control production, competition and prices. The world produces 340 million metric tons per annum, MMtpa global LNG in 2016. The takeaway for Nigeria as the 9th largest country in world natural gas reserve is that pragmatic measures should be to invest heavily in local use for industrial development takeoff.