Even with reasonably strong demand growth, this implies growing supply-side competition and upward pressures on development costs and downward pressures on natural gas prices. Nevertheless, the very positive longer-term outlook for natural gas is driving investment decisions, both in terms of buyers’ willingness to sign long-term contracts and sellers’ willingness to commit capital to develop the needed projects.
LNG demand growth is front-loaded, but in the wake of a capacity surge over the last few years, capacity growth is now back-loaded. We are seeing a post-Fukushima squeeze, as well as a slowdown in near-term capacity additions, pointing to relatively tight markets over the next few years. LNG development costs have been rising at a
torrid pace, and with LNG demand shifting to new, more price-sensitive customers just as the supply side battles with rising costs and increasing competition, sellers must adapt.
The supply/demand magnitudes and dynamics aside, the biggest potential impacts are on LNG pricing: namely, will oil-price linkages continue to dominate global LNG contract pricing, will there be room for spot gas price linkages, and will divergent regional gas prices show signs of convergence?
Going forward over the medium to longer term, there will most likely be a gradual but partial migration away from oil-linked pricing to more spot or hub-based pricing. LNG sellers are reluctantly facing the realities of pricing and are offering concessions in order to remain competitive.
However, LNG pricing should not collapse, simply because the cost to supply is high and incentives to develop new capacity must be maintained. As analysts at Macquarie point out, LNG is a very expensiv game, and prices — however they are formed — must reflect this reality.
Read the complete study in the attached pdf document
