Qatar’s LNG brownfield trumps Petronas’ greenfield hopes

LAUNCESTON, Australia: The shifting dynamics of the liquefied natural gas (LNG) industry have been neatly encapsulated by two recent decisions: the scrapping of a major new development and the expansion of an existing large-scale project.

Malaysia’s state-owned Petronas announced this week it was cancelling its US$29 billion Pacific Northwest LNG venture in Canada’s western British Columbia province, citing low global prices for the super-chilled fuel.

The decision not to proceed came after Qatar said on July 4 it planned to raise its LNG capacity by 30%, which would allow it to defend its title as the world’s largest producer against Australia, which is due to claim the crown once the last of its eight new projects is completed.

The Petronas announcement was not unexpected, given the 12 million-tonne-a-year project has suffered delays, engineering challenges and an LNG price only a quarter of what it was three years ago.

What Petronas’ decision does confirm is that it’s going to be extremely difficult to develop any greenfield LNG projects in the next few years, and not just in western Canada.

It appears the Canadians have missed the LNG boat, with their massive projects being proposed and planned after Australia embarked on building eight new liquid gas plants and the United States chipped in with five more.

The Australian and US projects, and others in East Africa and Russia, are expected to boost the amount of annual LNG available globally to around 454 million tonnes by 2020, up from around 340 million tonnes at the end of last year.

All this additional capacity is expected to push the LNG market into oversupply, which is likely to weigh on already weak prices.

Wood Mackenzie analyst Saul Kavonic forecasts the surplus will be around 17.8 million tonnes of LNG a year by 2019.

This will focus the industry more on costs, rather than building any new plants, Kavonic said in a blog post in May.

Kavonic’s analysis showed that most conventional LNG plants will be able to continue producing as they have ”very low short-run marginal costs.” 

The three plants in Australia’s Queensland state that use coal-seam gas as a feedstock and US plants reliant on shale gas may struggle more, he said.

QATAR SHOWS BROWNFIELD ADVANTAGES

This may be even more the case if Qatar raises its annual LNG capacity to 100 million tonnes from the current 77 million by developing the giant North Field, which it shares with Iran.

Qatar’s announcement of plans to boost LNG output did come against the backdrop of the country’s ongoing feud with some of its Gulf neighbours, including Saudi Arabia and the United Arab Emirates, who have alleged that Qatar supports terrorism and is too close to regional rival Iran.

But leaving aside any suggestions of political points-scoring and it’s clear that Qatar is able to do what Petronas cannot in Canada.

Qatar will be able to expand a brownfield development by boosting natural gas supply, de-bottlenecking its existing facilities and building some new units.

While Qatar is blessed with some of the cheapest to extract natural gas, its ability to ramp up capacity also shows the advantage of merely adding to, or improving, existing facilities rather than starting from scratch.

It’s likely that any new LNG developments in the next few years will have to follow a similar path, with the era of greenfield mega-projects at an end for the foreseeable future.

While it’s possible some greenfield projects will proceed, these will be very much the cheapest to build, such as floating LNG ventures off the East Africa coast.

The LNG boom of the past several years is following much the same path as the earlier expansion of iron ore and coal.

In these two bulk commodities, massive new projects effectively tipped the markets into global surplus, curtailing new mega-projects, but allowing for incremental production increases at existing mines.

The LNG industry now finds itself more or less where iron ore and coal were a couple of years ago. The LNG market will similarly have to re-balance, most likely through a period of low prices, before demand gains once again put stalled projects like Petronas’ Canadian venture back into play. - Reuters