Page 8 - AsiaElecl Week 37

AsiaElec COMMENTARY AsiaElec

Reduced LNG demand

drives project delays

Investors are widely expected to delay sanctioning new LNG export capacity
on the back of depressed demand and an uncertain economic outlook

ASIA LIQUEFIED natural gas (LNG) prices have Tight funding landscape
taken a beating over the past couple of years, More than 70mn tonnes per year (tpy) of new
WHAT: as first warmer-than-expected northern hemi- export capacity reached FID last year, leading the
A new report suggests sphere winter temperatures and the coronavirus industry to anticipate a similar volume would
that no new projects will (COVID-19) crisis demolished demand. be approved in 2020. The start of the year saw
reach FID this year Buyers had already begun to shun long-term around a dozen projects the US alone that were
supply contracts in favour of the spot market on track to be sanctioned.
WHY: when the pandemic struck, forcing buyers in Enthusiasm has waned, however, amid
The current supply and India and China to declare force majeure. While continuing uncertainty over the COVID-19
demand imbalance has Asia’s buyers are once more returning to the mar- pandemic and the global economic outlook.
scared off many investors ket looking for bargains, the situation has left Banking and energy insiders are increasingly
investors in new export capacity jittery. pessimistic about the prospects of even a single
WHAT NEXT: Reuters reported this week that 2020 could project reaching FID this year.
If project delays persist, be the first year in at least two decades that no “We do not expect any major FIDs on LNG
then prices may end up new export projects reached a final investment export projects this year,” Morgan Stanley’s lead
soaring by the middle of decision (FID). The timeframe was provided by commodity strategist for natural gas and power,
the decade the International Energy Agency (IEA), while Devin McDermott, told Reuters on September
Wood Mackenzie said the current situation was 9. “With [COVID-19] reducing oil demand and
last seen 1998. prices, majors’ capital spending dropped, weigh-
Given that the traditional financing model ing on their investment and pushing out FIDs.”
for LNG projects has relied on term supply con- McKinsey & Co. partners Giovanni Bruni
tracts to underwrite the bulk of supply, it is little and Alessandro Agosta echoed this sentiment,
wonder that financiers have become a little gun- noting that all projects awaiting sanction would
shy. That reticence to invest, however, could well likely be delayed by up to two years, owing to
lead to a tightening in supply by the middle of the capital expenditure cuts and challenges in sign-
decade that will drive prices back up as demand ing term contracts.
outstrips supply. Underscoring the buyer challenge, Bloomb-
erg reported on September 10 that Japanese

P8 www. NEWSBASE .com Week 37 16•September•2020