An Overview of Global Liquefied Natural Gas Markets and Implications for Canada

Abstract

Liquefied natural gas (LNG) is a small but growing share of the global natural gas market. Global consumption of natural gas rose by 2.4 per cent between 2005 and 2015. The majority (70 per cent) of consumption relies on indigenous production. Most of the rest comes from pipelines, with LNG sourced natural gas growing from seven to nine per cent of consumption between 2005 and 2015. Global LNG imports increased rapidly between 2005 and 2011, rising from 193 to 334 billion cubic metres annually. They have stayed relatively constant since, averaging 324 billion cubic metres annually. Europe and Asia and Oceania are the primary recipients of LNG imports, accounting for 90 per cent of global imports from 2005 to 2015. An increase in global LNG liquefaction terminals accompanied the rise in imports. From 2005 to 2015, the number of liquefaction terminals increased from 20 terminals in 13 countries to 38 terminals in 20 countries. Total global liquefaction capacity rose by almost 90 per cent, mostly in the Middle East. The growth in LNG is largely attributable to an increasing mismatch between areas of natural gas supply and demand. As of 2016, the world’s natural gas reserves were estimated at 194,782 billion cubic metres, with the Middle East and Russia and Eurasia having the largest shares, respectively. Despite having smaller reserves, the largest gas-producing region is North America, which accounted for 26 per cent of global production from 2005 to 2015. Production in North America – and specifically the United States – steadily increased over this period as a result of advances in horizontal drilling and hydraulic fracturing and a corresponding surge in shale gas. More so than other energy sources, the gaseous nature of natural gas has historically made it difficult to trade. This contributed to a rise in regional markets, with corresponding variation in prices. From 2010 to 2015 the LNG price in Asia was significantly higher than natural gas prices in Europe, which were in turn higher than prices in North America. These price differentials incited what was frequently referred to as the “LNG race,” with project proponents seeking to lock-in supply contracts and secure final investment decisions for new LNG liquefaction terminals. Although price differentials still remain, they have narrowed considerably since the start of the oil price crash in 2014. Lower prices, combined with a growing surplus of LNG liquefaction capacity, has led to a significant slowdown in the approval of new LNG liquefaction terminals in recent years. Looking ahead, however, another opportunity for LNG development lies on the horizon. Even if governments enact stringent measures to curb greenhouse gas emissions, natural gas production and consumption is expected to keep growing – the only fossil fuel to do so. Forecasts also suggest that the mismatch between areas of supply and demand will continue to become more pronounced. Production growth in the Middle East, Russia and Eurasia, North America and Africa is forecast to exceed growth in demand. Correspondingly, all three regions are anticipated to have a growing natural gas surplus through to 2040. In contrast, Europe and Asia and Oceania both currently have natural gas deficits that are also forecast to grow. New infrastructure will be critical to getting natural gas to consumers. While pipelines remain the cheaper option for transporting natural gas, Russia and Eurasia is the only major producing region with significant or planned pipeline access to external demand markets. As a result, it is expected that a second wave of new LNG capacity will be required by the mid-2020s. Having missed out on the first LNG race, this second development window offers the most promising opportunity for proposed Canadian export facilities to enter the global LNG market. With numerous proposals for new liquefaction terminals on standby around the globe, however, this next wave of LNG development will again be highly competitive. It is therefore important that Canadian firms and investors act now to manage investment risks and position themselves to proceed with proposed projects as soon as the next window opens. Moreover, Canadian governments have an important role in ensuring the stability of policy and regulatory environments underpinning Canada’s attractiveness as an investment destination.