2009 will be a year of historically low LNG prices

How the world has changed! In a few short months, the euphoria of the world energy markets has given way to pessimism and foreboding for the future. Energy companies have had to grapple with dramatically reduced revenues (if they were lucky enough to have producing assets) as well as the start-up of expensive projects, most of which were constructed during the past few years when all costs – including labor, steel and other metals, land, and energy – were at historically high levels. A perfect storm of tough times.

There will be an unprecedented increase in LNG production in 2009 – in a recent report, Citibank estimated that worldwide LNG production capacity will increase by around 20% this year. Unfortunately, demand for LNG is softening across all markets. Traditional LNG consumers such as Japan / Korea, emerging markets such as India / China, and established markets such as Europe and North America are simultaneously facing slowing power and industrial production – directly impacting the volumes of LNG they will import. Inevitably, we will see prices drop significantly. This will impact both LNG delivered under longer-term contracts (most of which are indexed to declining oil prices) as well as spot cargo deliveries dependent on tight demand to sustain high prices.

As increasing number of LNG cargoes look for a home, we will see a return to oil parity prices. At an oil price of $36/Bbl, gas priced at ‘oil parity’ would sell at $6/MMBtu. This author has long maintained at that at gas prices approximate oil parity when oil prices are less than $50/bbl. There is even a chance that we could see LNG sell at a discount to oil parity as LNG volumes exceed market demand. This would be a tough year to sign high-priced LNG sales contracts and we would expect discount buyers such as the Chinese and Indians to push for large discounts.

However, there is light at the end of the tunnel. The longer term forecast for gas demand is unambiguously rising – and there have been very few LNG project actually sanctioned in 2007 - 2008 (and probably very few will be sanctioned in 2009). Thus, in a couple of years (mid 2010 ?) we should be back to happier times, when LNG markets were tight and sellers dictated terms and buyers had no choice but to accept higher prices.