LNG WORLD MARKET OUTLOOK FOR 2016

LNG WORLD MARKET OUTLOOK FOR 2016 January 2016 Summary 2016 will see first US LNG exports from the Gulf Coast, a sharp rise in Australian production and the first floating export project in Malaysia. Demand concerns will persist from east Asia with seller margins hit by low oil prices. Europe will receive additional cargoes, but the market has been weak for some time with hub prices continuing their descent. In the Americas, buy tenders may be on a smaller scale than in previous years while the Middle East could prove a useful end market for short-term cargoes. AUSTRALIA Supply ramp-up from the east coast With the Australia Pacific LNG (APLNG) plant officially starting its first train on 11 December, Queensland now has four LNG trains that could potentially run at full capacity at the same time. Besides the impact on domestic gas supply, LNG production from these trains could feed into the bearish sentiment in the Asian market as the north hemisphere winter draws to a close. Both APLNG and Gladstone LNG (GLNG) are expected to start up their second trains in the first half of 2016, which could lengthen global supply further if the long-term offtakers exercise downward quantity tolerance on contracts, boosting volumes in the short-term market. 1

On the west coast, Chevron s Gorgon LNG is due to start up in the first quarter and this will bring the current raft of new Australian projects to a close. Chevron s Wheatstone LNG export complex in western Australia is expected to produce its first cargo by end-2016. INDIA Australia s four new export plants have combined LNG production of almost 41mtpa Total nameplate production from QCLNG, GLNG, APLNG and Gorgon is 40.9mtpa, just over double Australia s previous export capacity. Although Australia s competition authority has approved Anglo-Dutch Shell s acquisition of UK-based BG Group, domestic market participants remain wary of the longterm repercussions. While it is unclear whether Shell plans to divert the gas from its Arrow Energy joint venture to BG Group s QCLNG for LNG exports, growing domestic demand and insufficient supply sources could push prices up and impact end users. Buyers to cash in Perhaps the greatest beneficiary of an ongoing oversupply will be Indian buyers, who are expected to purchase more spot LNG in 2016. The market will remain the centre of attention for producers with flexible volumes, alongside portfolio and merchant traders. LNG usage in power generation is expected to increase due to the government s scheme to revive stranded gasbased power plants. State-run refiners IOC, BPCL and some private independent companies may be more active in the spot market, with short-term tenders the favoured way of securing LNG. Much will depend on the evolution of Asian spot pricing. Volumes priced under the recently-renegotiated long-term 7.5mtpa Petronet-RasGas contract are expected to be delivered from January, with a shorter reference period to the historic oil price. The additional 1mtpa of supply lined up through the renegotiation is to be sold by Petronet to its four existing offtakers GAIL, IOC, BPCL and GSPC. East coast LNG infrastructure is expected to get a boost this year with a final investment decision (FID) on the 5mtpa Kakinada floating LNG import project in Andhra Pradesh expected by March. The project will complete in 18 months from the FID date, according to project developers. Pipeline connectivity from the 5mtpa Kochi LNG terminal on the west coast is expected to improve as the state government is looking at expediting the process of laying pipelines and completing the work by mid-2016. This could lift the usage of the terminal which until last year had a utilisation rate of under 5%. Petronet is expected to take the delivery of its fourth LNG vessel - 173,000 cubic metre (cbm) Prachi from South Korea s Hyundai Heavy Industries. The vessel will transport LNG from Chevron s Gorgon project in Australia to Kochi. CHINA Government focus, private companies The Chinese government s announcement of a yuan (CNY) 0.70 ($0.11)/cbm cut for city-gate gas prices to nonresidential users is likely to boost domestic consumption in 2016. While the price reduction should encourage private gas distributors and large industrial end users to increase their usage, state-owned importers who hold expensive long-term contracts for LNG and pipeline gas might suffer. Higher domestic demand might not translate into increased LNG imports if the crude oil price remains weak into the New Year because of cheaper competing fuels. Although ENN Energy, Pacific Oil & Gas and Guanghui Energy each imported one cargo in early 2015, these independent buyers had expected to import more LNG throughout the year. The difficulty of obtaining terminal access due to the uncertainty of state-owned PetroChina s shipping schedule and full storage tanks dented their import ambitions. This scenario will likely repeat itself in 2016 if domestic consumption does not pick up as expected. Newcomer Beijing Gas is not expected to receive another cargo at PetroChina s terminal beyond January. State-owned major CNOOC has awarded three cargoes from its equity allocation at the Queensland Curtis LNG 2

(QCLNG) project this year and aims to market a few more cargoes in 2016 as it establishes itself as a trading force. Fellow major Sinopec has also been busy marketing its long-term volumes from the Australia Pacific LNG (APLNG) project, but it is unclear if it has been successful. Much depends on whether its two new terminals can start up on schedule. PetroChina already has a successful trading arm that will continue to optimise its portfolio in both basins as it continues to grapple with high inventories at its terminals in China. The company recently concluded a supply position into Egypt. While much will depend on China s 13th five-year plan that is due in March, new LNG buyers such as China Huadian are banking on receiving approval for their proposed terminals from the energy administrator. Approval would mean these buyers can start building their terminals and pipelines in preparation for their long-term contracts and possible trading opportunities from 2020. There could also be further reform as China introduces more market-related mechanisms that erode the state-owned importer s monopoly and allow more independent companies to enter the LNG market. The Shanghai Petroleum & Natural Gas Exchange (SHPGX) is expected to help domestic pricing to be fully dictated by market forces over the following two to three years. The exchange formally started facilitating trades for pipeline gas and LNG deliveries from December 2015. However, it remains to be seen whether it can stake a claim as a reliable benchmark for Asian LNG prices. EAST ASIA Ongoing demand concerns Uncertainty over Japan s short and long-term LNG demand will persist. Utility Kyushu has restarted two Sendai nuclear reactors, and Shikoku Electric will soon be restarting a reactor at its Ikata plant. Kansai Electric plans to restart nuclear production at Takahama in late January. Electricity use is still declining in general, meaning LNG demand is going down as part of a secular trend. But demand may be volatile, as TEPCO and some other utilities have until recently cut down their oil usage, meaning that any spikes or drops in power demand will have a big impact on LNG demand. ICIS is your one-stop source of intelligence. ICIS is your one-stop source of intelligence to optimise returns or investments when trading LNG. We offer valuable information and analytic tools to help you understand and quickly identify opportunities in a market that is continuously evolving. LNG Edge - Real-time LNG analytics and tracking tool LNG vessels location and status spot, laden, ballast Import-export volumes Buyers, sellers, transacted price LNG cargoes, destinations and ETAs Open tenders as they happen Global list of spot trades Long-term contracts database ICIS LNG spot prices per key trading port Outages and risk calculator Wealth of historical data trading patterns, routes, imports, exports next port of call, charter rates Request for a one-to-one demo LNG global pricing data and news We publish the most extensive list of global LNG spot prices, and historical data in the world: 24 spot DES assessments 8 spot FOB prices Regional indices: East Asia (EAX), Middle East and North Africa (MENAX), South America (SAX), and Mediterranean (MDX), Northwest Europe (NEX) and Iberia (IBX) Historical prices LNG vessel availability and tanker movements Market news and analysis bids, tenders negotiations and confirmed deals. Request a sample of our LNG Reports Japanese companies will continue to work to balance potential supply length ahead of US supply contracts kicking in later in the decade. This may involve setting up deals to access regasification capacity in Europe, or more 3

agreements such as between joint venture JERA and Shizuoka Gas which could see the former supply LNG based on the US natural gas price. South Korea s KOGAS will be an Asian leader when it takes US volumes from train 3 of Cheniere s Sabine Pass from 2017. The company will also lift more from Australia s GLNG, in which it holds a 15% stake, on a free on board basis. KOGAS has already taken steps to mitigate supply length by gaining access to European import capacity. But the outlook for South Korean gas demand is weak with Korea Hydro & Nuclear Power due to start a new 1.4GW Shin Kori No 3 nuclear plant in May and coal-fired generation likely to continue at a higher rate than gas. A more positive exception could be Taiwan, where the government seems committed to decreasing nuclear output after Fukushima-era protests. Renewable energy production is set to increase, but not for a number of years. But a possible rise in LNG demand could be offset by electricity producer Taipower ramping up coal-fired units that have been down for most of 2015. Taipower is supposed to join LNG buyer CPC as a fellow importer but is still waiting on the start of construction for a new terminal. SINGAPORE Slow domestic progress State-owned Singapore Exchange (SGX) plans to launch LNG futures in January 2016. This follows on from SGX s launch of an Asian LNG index, the FOB Singapore SLIng in June 2015. The weekly-priced index includes 20 pricing contributors and when futures contracts are launched, the underlying methodology will be based on the Singapore SLIng index. Current market sentiment still shows a preference for hedging based on oil rather than gas pricing, however, especially in the Asian market. Growing liquidity in Australian and US export markets could provide a basis for hedging activity based on an FOB index but this remains at an early stage. Singapore s plan to appoint up to two LNG importers has faced recent challenges. On 1 December 2015, the government postponed the selection process as all four short-listed companies had requested for an extension to the second stage of the request for proposal (RFP). As part of the RFP, BG Singapore Gas Marketing, Shell Eastern Petroleum and Singapore s Pavilion Gas and Sembcorp Industries had to secure a minimum of 0.6mtpa worth of downstream agreements by the original deadline of 29 February 2016. However, with falling LNG prices and scarce demand, they now have until 30 June to submit their proposals, with Singapore likely to announce the final two LNG importers in the fourth quarter. SOUTHEAST ASIA Floating LNG approaches In Malaysia, PETRONAS $4.5bn 1.2mtpa floating PFLNG 1 project is expected to be ready in the first quarter. As the country s supply dwindles on maturing gas fields, PETRONAS aims to utilise a fleet of smaller, versatile FLNGs to reach and monetise gas from harder to reach areas. The 3.6mtpa Train 9 at the Bintulu MLNG complex is also due online in 2016, although recent local reports indicate this is more likely to be later in the year. In Thailand, the expansion of the Map ta Phut terminal to 10mtpa from 5mtpa is expected in 2017 which will tie in with 3mtpa of supply deals agreed by PTT over the course of 2015. The recent postponement of one import cargo has cast some doubt over the short-term demand from what is expected to be a growing market. Small-scale infrastructure should start to play more of a role in supplying regional power plants in the Philippines and Indonesia. The latter country expects a sharp rise in domestic gas consumption but demand for LNG remains unclear given the lack of a consistent pipeline network. The floating import terminal at Lampung received only one cargo in 2015. US First exports beckon A delay in start-up means the first cargo to be produced out of Sabine Pass is expected to be shipped by Cheniere in February or March, rather than January. The commissioning cargoes are expected to be sold to the short-term market by Cheniere s trading entity Cheniere Marketing, with the possibility of the first cargo heading to Brazil, given the ability for state-run Petrobras to absorb a commissioning cargo. 4

BG Group s contract with Cheniere is scheduled to start in the second half of 2016 and the buyer has the option to lift cargoes before this date based on the same price mechanism used in the long-term contract. Spain s Gas Natural and South Korea s KOGAS s contracts for lifting from Sabine Pass trains 2 and 3 respectively will both start in mid-2017. Only the first and second trains of Sabine Pass are expected to start up during 2016, while the rest of the sanctioned projects in the US Freeport LNG, Cameron LNG, Cove Point and Corpus Christi are moving forward with construction. Offtakers from each of the projects are marketing LNG volumes downstream and securing feedgas commitments. Pushed lower by unseasonably warm temperatures and starting the winter season with high inventories, US natural gas futures prices for January 16 delivery consistently settled at historically-low settlements for the front month, reaching levels not seen since 1999. Cash prices have also traded at a discount, reflecting the low demand for winter heating. Futures prices starting from mid-2016 have begun to decouple from the front curve, reflecting the ramp up of LNG exports and increased pipeline exports to Mexico once the second stage of the Los Ramones pipeline comes online. Short- and mid-term commitments will continue to be sought by Cheniere, which has reserved allocated incremental cargoes for its own trading from Sabine Pass and Corpus Christi, as well as offtakers seeking to resell volumes on the secondary market. EUROPE LNG s old/new friend? The relentless increase in global LNG production means deliveries into European terminals and interest in securing terminal capacity will both increase this year. Cheaper gas could support demand for gas-fired generation, taking some of coal s share. But pipe supply will continue to cover the majority of demand, meaning any sharp increase in LNG deliveries could push prices down, and possibly to levels that LNG sellers struggle to justify. US suppliers and Asian companies have been eyeing capacity and available slots at terminals in the UK and France. So far, the most obvious shift in LNG supply has come from an increase in deliveries from Qatar into the UK and Italy. LNG reloads from northwest European terminals are expected to rival or overtake Spanish reloads, with merchant traders utilising access to traded markets, especially those with short-term positions into relatively near Middle East markets. In France, the 13 billion cubic metre (bcm)/year Dunkirk 5

terminal is expected to receive a commissioning LNG cargo by the end of February. The terminal is also expected to begin reload and small-scale LNG operations this year. France s Total and EDF have 8bcm/year and 2bcm/year capacity at the terminal for a 20-year period. Poland s newly commissioned Swinoujscie terminal is expected to receive volumes from February, but contract renegotiations with Qatargas mean cargoes previously destined for Poland can continue to be sold into other markets this year. Work on the floating storage conversion unit for Malaysian Bumi Armada is scheduled for completion in the third quarter. The vessel will operate at the Delimara LNG regasification terminal in Malta. The use of LNG as a marine fuel remains Europe s best hope for long-term growth and could prosper in 2016 following the introduction of new emission regulations for the sector from last year. The construction work on Finland s first small-scale LNG terminal in Pori is expected to complete by the autumn. The 30,000cbm terminal will improve the availability of LNG in Finland and reduce emissions, according to natural gas incumbent Gasum. Truck loading and reload operations from the Isle of Grain terminal in the UK are also expected to increase this year. MIDDLE EAST One area of optimism In the course of 2016, the Middle East could present opportunities for both buyers and sellers to optimise their spot volumes. Qatargas is likely to offer flexible cargoes to third parties as well as directly participating in tenders held by its longterm customers such as Kuwait s KPC and Thailand s PTT. The producer may have a greater availability of flexible volumes in 2016, as buyers are expected to increasingly make use of flexibility to take lower volume in contracts. Given large storage facilities in Dubai, the emirate is now viewed as a potential dumping ground for excess cargoes that could not find a home elsewhere. On the buy side, Kuwait and Dubai are expected to increase imports this year. Kuwait will be seeking two cargoes per month during the peak of its demand season to supplement its basket of mid-term agreements. Dubai has secured a number of put options with sellers that would allow the company to absorb LNG at below a 12% slope price of 90-day Brent crude oil indexation. 6

In North Africa, Egypt s state-owned EGAS and Jordan s power company NEPCO will continue to absorb volumes secured during tenders held in 2015. These volumes could be supplemented by additional tenders in 2016. The rising liquidity in the region is likely to attract cargoes from the Atlantic Basin to Egypt and Jordan, while Pacific basin volumes, particularly from eastern Australian projects, will target at customers in Kuwait and Dubai. Egypt is attracting prices at levels similar to those paid by buyers in northeast Asia, sources said. This is due to the fact that many slots seen on that market were secured as short positions. Kuwait, on the other hand, typically monitors levels paid by buyers in India and buys on a netback basis. RUSSIA Qatar is looking for new buyers to take its flexible volumes and will look both to the east and the west Slow progress on new projects Russia s Gazprom and Shell will continue to work on the expansion of the existing Sakhalin-2 project in the country s far east region, where most volumes from the proposed train 3 have been placed with the Asian buyers. Construction at Yamal LNG, which has also committed more than 98% of its production under long-term contracts, will continue as planned. Both projects have faced difficulties due to the existing sanctions regime, which mainly impacted access to finance from foreign sources. With continuous pressure on crude markets, the feasibility of Gazprom s Baltic LNG project near St Petersburg remains under question. The project, which is supposed to be supplied directly from Russia s gas grid, is yet to sign any long-term contract. Increased global competition on supply means that the buyers are now willing to pay much lower indexation levels than previously. On the spot market, Russia s incumbent Gazprom and state-owned oil producer Rosneft both signed agreements with Egypt for 35 and 24 cargoes respectively. However, both deals failed to materialise into concrete contracts. Much speculation revolved as to where Rosneft would secure the supply from with some market sources expecting a cross-commodity swap or other swap arrangement. The Sakhalin-2 project is likely to hold several tenders next year, as long-term buyers have nominated close to the minimum under annual contract clauses. This means that additional supplies from Russia are likely to hit the market as early as the first quarter. AMERICAS Steady project progress South American importers have taken a step back from competing as the premium buyers, as overall demand has eased with the slowdown in economic growth. While Argentina s gas distributor ENARSA prepared for its 2016 requirements, the banner attention and pricing that the ENARSA tenders once commanded are likely to be replaced by smaller procurement rounds, organised by state-run YPF. So far, nine cargoes have been sought over the first quarter. The transition of the Macri government will likely usher in new energy policy, which could change Argentina s LNG buying strategy and relationships with neighbours such as Chile. Brazil s state-run Petrobras has grappled with the ongoing government probe among its executives, which has left some longer-term strategy planning in the air. Petrobras has discussed opening up spare capacity at its three floating storage regasification units (FSRUs) to private power generators and Brazilian entities, but the timing of implementation and overall pricing remains unclear. Other plans to propose floating terminals by private companies such as Bolognesi Group and GenPower still must overcome the hurdle of matching competitive pricing in Brazil s upcoming auctions. Smaller potential buyers such as El Salvador have gained attention from global sellers looking to place long-term volumes from the US projects. A shortlist has been formed and a supply agreement is expected soon to be in place for the onshore terminal, which is expected to be online starting in 2018. 7

Start-up of a Colombian floating import terminal by a consortium of power generators is expected before the end of 2016 with an FSRU provided by Norwegian shipping company Hoegh. The FSRU will provide LNG to the Colombian market, which struggles with soaring gas demand during El Nino years. In Chile, companies that have been awarded expansion capacity at the Quintero terminal are separately seeking supply: IC Power, AES Chile and Chilean generator Colbun. The three companies were in advanced stages of supply discussions, although their respective power projects to underpin the capacity are in various stages of development. Shell s Andes LNG project, which is expected to be situated between Quintero and Mejillones, remains at a feasibility stage, while the planned GNL Penco project in southern Chile, led by Cheniere and generator Biobiogenera, has progressed through permitting. Chile s state-run refiner ENAP is expected to seek more capacity at the existing Mejillones terminal, given the country s mandated plans for the company to secure natural gas. 8