Caspian Report - Issue: 08 - Fall 2014

MATTEO VERDA
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of the global LNG market. Currently,
India has significant regasification
capacity: 4 terminals with a combined
capacity of 38 bcm per year,
of which 12 were commissioned in
2013. Moreover, another terminal
of 7 bcm per year is under construction
and several others are at various
stages of planning.
Currently, all Indian imports are via
LNG and the construction of a pipeline
from Iran or Turkmenistan faces
major geopolitical obstacles, and is
unlikely to materialise anytime soon.
As a consequence, LNG will supply
the additional import demand of
the Indian market. According to the
IEA’s predictions, India will increase
its imports from 17 bcm in 2013 to
25 bcm in 2020 and 54 bcm in 2030.
The sheer size of India’s estimated
demand will affect global markets,
creating more competition. However,
unlike China, India has no alternative
import sources to LNG and
therefore the position of the producers
will be strengthened.
OUTLOOK TO 2020 AND BEYOND
LNG is an Eastern Asian business
and the situation is unlikely to
change significantly within the current
decade. Asian economies are
growing, driving up energy demand.
China and India will lead this trend,
but smaller developing countries in
the region will also see their energy
imports grow steadily. Moreover, industrialised
economies, namely Japan
and South Korea, will continue
to rely on massive energy imports,
including LNG.
Outside the region, a significant increase
in LNG imports is likely only
in Latin America, despite some uncertainty
in the fundamentals of
economic growth. Northern America
is set to become an exporter of
LNG, completely reversing expectations
of just a few years ago.
The European case is more complex,
but the outlook for LNG demand is
likely to remain very weak during
this decade, and at best uncertain
for the next one. European economic
growth is weak and even in the case
of a significant recovery, natural
gas consumption will take a decade
to return to pre-crisis levels, since
improved efficiency and subsidised
renewables have structurally reduced
final demand for fossil fuels.
Moreover LNG faces strong competition
from exporters of piped gas,
which are captive to costumers and
ready to accept lower prices. Even
in the most dynamic market, Turkey,
LNG is likely to remain a secondary
source of gas, due to the competition
of piped gas from different sources.
The only major driver for a surge in
the European demand of LNG may be
a further destabilisation of Ukraine
or Northern Africa, with long interruptions
to pipeline imports from
Russia and Algeria. The impact on
the LNG market will depend on the
severity of those interruptions, but
the likelihood of this scenario is very
low. Moreover, interconnections between
different European networks
have significant bottlenecks, limiting
the scope for a potential substitution
of piped gas with LNG imports
without massive investments.
Considering LNG prices, current differentials
between Eastern Asia and
the rest of the world are based on the
lack of alternatives for the main importers,
Japan and South Korea. Increased
supplies and a certain arbitration
capacity for the Chinese buyers
may lead to a structural lowering
of the price level on the East Asian
markets. However, the strength of
the final demand in the region is
likely to justify a positive differential
between Asian and non-Asian prices
even in the future decade.