LNG - Overhyped, Undervalued - or Misunderstood? Part 1 - The Market
As the LNG sector experiences a near-daily surge in project announcements, the specter of overbuilding looms. Is this intense growth merely hype, forecasting an inevitable crash, or is it the natural consequence of prior underinvestment and rapidly growing demand?
This three-part series seeks to foster a more informed dialogue. We will delve into Market Size in Part 1, scrutinize Gas-Fired Power Generation in Part 2, and dissect overall Market Dynamics in Part 3. And in the process, we will examine the implications for market participants.
[This article is not financial or investment advice, but provided for general information purposes only. All information is subject to change and should not be relied upon for any decision making. See Webpage Terms of Use.]
The Market - Bottled or Tap?
Central to any informed discussion on LNG is a clear market definition. LNG is a subset of the global Natural Gas market; outside of specialized applications like vessel bunkering, the -162°C liquid form is not the end-product. Customers fundamentally demand natural gas, rendering LNG and pipeline gas direct substitutes in nearly all use cases. Therefore, understanding the scale of these distinct yet substitutable markets is paramount. Key benchmarks include:
The size of the Global NatGas Market (domestic, cross-border pipeline, LNG) is ~ 375 Bcf/d
US NatGas consumption (excluding LNG & other exports) is ~ 90 Bcf/d
Global LNG trade is ~ 56 Bcf/d
Market Size Comparison
Therefore, the global LNG market accounts for less than 15% of total natural gas demand, and it is almost 40% smaller than U.S. domestic natural gas consumption. This underscores LNG's relatively small footprint within the broader natural gas landscape. This modest share is primarily due to the higher costs associated with liquefaction – akin to bottled versus tap water – a point we will elaborate on in Parts 2 and 3.
Furthermore, a critical imbalance exists in global infrastructure: regasification capacity, significantly less expensive to develop than liquefaction, is roughly 2.5 times larger than total liquefaction capacity. It's also worth noting that the global natural gas market remains smaller than the global coal market.
Together, these fundamental facts carry significant implications:
Short-term growth potential: As long as the price is right (or some kind of crisis demands it), LNG demand can grow significantly in the short-term. Import capacity is a minor constraint.
Absolute growth potential: Given the small absolute size of the LNG market compared to other energy commodities, even small substitutions (coal to gas for power generation, oil to gas for domestic and commercial heating, etc) can translate into substantial LNG demand growth.
Relative growth potential: LNG may serve to replace other sources of NatGas. Egypt has become an LNG importer. We have seen reports about domestic gas production in Pakistan being shut in due to LNG imports. And Europe has seen ~25% LNG demand growth from 2021 to 2024, despite overall NatGas demand falling by around 20% over the same time period. This point is most frequently misunderstood - LNG demand can be negatively correlated with NatGas demand, yet many forecasters model LNG demand as a percentage of global NatGas demand. This is fundamentally flawed.
Even as the sector witnesses an unprecedented expansion in liquefaction capacity, much of the new demand remains highly price-sensitive. As highlighted in our recent analysis of the LNG spot market, generating this demand will necessitate substantially lower prices absent new crises. Thus, the pursuit of higher demand does not automatically translate into higher profits, challenging the notion of a universally 'bullish' market.
What does this mean for market players?
In volatile commodity markets, price forecasts are bound to be wrong. Monthly JKM prices stayed in the USD 2-3/MMBtu range for six months in 2020. No one foresaw the price spikes following Fukushima or the Ukraine crisis either. And we need to always keep in mind that most LNG is traded through long-term Sale and Purchase Agreements with crude-indexed or tolling price formulas - thus most customers do not pay JKM or TTF spot prices. We will dive deeper into this aspect in part 3.
Long-term success, therefore, hinges not on predicting the market but on building resilience. We believe that robust risk management and agile scenario planning are far more critical than chasing precise price forecasts.
Every LNG player with spot market exposure should at least model a scenario of 4-6 consecutive quarters with spot prices in the USD 5-6/MMBtu range. While we can't predict the timing, length or pricing (it could be better or even worse), the likelihood of such an event is considerable. To truly benefit from price spikes, market participants must first be prepared for the opposite: a sustained period of low prices.
If you would like to explore these implications further and raise the resilience of your contracts, please do not hesitate to contact us.
Coming soon - Part 2, LNG to Power. Stay tuned!
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