Collateral damage: LNG also hard-hit by low oil pricing

The global market for liquefied natural gas (LNG) is an inadvertent casualty of the current decline in oil prices, and the somber atmosphere of caution among investors because of uncertainty in the oil market will spill over to the LNG industry and serve to delay LNG projects for the time being.

In the 10th installment of a webcast series entitled “Oil: The Great Deflation,” a team of IHS experts this week delivered a presentation called “LNG and the Impact of Oil Prices: A Case of Collateral Damage.” The session concluded that LNG—which can be used to replace oil in transportation—has been negatively impacted by the fallout resulting from low oil prices, with investments in LNG now being held back in the face of significantly constrained corporate budgets.

The weakened picture for LNG comes on top of IHS forecasts projecting an oversupply in global LNG to occur by next year, said Michael Stoppard, chief strategist for global gas at IHS Energy. New supply capacities will be coming online from LNG installations in the United States and Australia, adding to existing sources, but no large spikes in demand are expected for the global LNG space that could accommodate the subsequent glut.

A very real worry overall, Stoppard said, is that a soft LNG market already rendered vulnerable by the oil-price crisis would be further debilitated when LNG oversupply first manifests in 2016, and then sweeps in with full force a year later in 2017.

Despite the sobering picture ahead, Stoppard said the fundamentals underlying the LNG market remain sound and viable, especially for US brownfield projects that already have found interest among future buyers.

The United States will do well against anticipated new LNG supply sources coming online in other parts of the world, including Canada, Mozambique and Tanzania, the East Mediterranean, and Russia, said Gautam Sudhakar, director for global gas at IHS Energy. The costs are higher in places outside the United States, he noted, making their future revenue potential more unpredictable.  

A key opportunity moving forward is for the industry to create demand for LNG to replace oil, especially in the transportation sector involving heavy-goods vehicles (HGV), marine shipping and railway cars. The global HGV sector alone uses some 12.6 million barrels of oil a day, and even a small portion that LNG can wrest away from the oil market will translate into real gains, IHS believes.

The next webinar in the Great Deflation series will be “North America: The Shale Adjustment Three Months In,” scheduled for March 24.  

Learn more about IHS LNG Strategic Research and Forecasting Services and download a map of LNG Supply and Demand.

Staff Writer, IHS Energy
Posted 25 March 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.