Australian LNG Faces Double Whammy of Oversupply: IEEFA

Australian liquefied natural gas (LNG) producers are potentially facing a couple of challenges in the global market: an oil supply glut and a global LNG oversupply.

The Institute for Energy Economics and Financial Analysis (IEEFA) said in a news release that demand for LNG is starting to decrease in mature markets. European demand for LNG is expected to peak in 2025 and then decline, with its gas consumption having already decreased by 20 percent in the last two years. Japan’s LNG demand has decreased by 25 percent since 2014, and is expected to decrease by a further 25 percent by 2030 as LNG is displaced by increasing nuclear and renewables generation. South Korea’s LNG imports fell by five percent last year, and are expected to fall further by 2030.

A report published by IEEFA, Global LNG Outlook 2024-28, found that global LNG markets are headed towards a supply surplus within two years. Between 2024 and 2028, global LNG supply will increase by 40 percent, an unprecedented level of growth for the LNG industry in such a short time period. Capacity additions are dominated by Qatar and the USA, which have much lower costs of production than Australia, according to the report, which noted that Australian producers could face “high risks of declining prices for the uncontracted portion of their production”.

The International Energy Agency (IEA) recently predicted surplus petroleum production in the global markets of up to eight million barrels per day by 2030.

The glut is due to rising oil supplies led by non-OPEC+ producers, in particular the USA and South America, while demand is forecast to level off. The oil demand slowdown is driven by the fast increasing uptake of electric vehicles worldwide, combined with the improved efficiency of petrol or diesel vehicles. Oil use is also decreasing for power generation, replaced by renewables or gas, the IEA said.

The oversupply could lead to a price drop for oil, the IEEFA said, noting that Australia’s LNG sector is “heavily exposed to oil prices due to the majority of its existing LNG contracts having pricing directly linked to oil prices”.

The IEEFA explained that Australian LNG contracts usually include a limited fixed-price component as well as a variable component based on a benchmark such as the Brent crude oil price or the Japan Crude Cocktail (JCC) price. “While the fixed component is typically increased slightly under a predefined threshold, low oil prices for a prolonged period of time would likely lead to financial losses for contracted LNG,” the agency remarked.

While the majority of Australian LNG is currently sold through long-term contracts, a large share of those contracts will start expiring after 2030, the IEEFA continued. “As a result, producers will increasingly find themselves exposed to growing competition – either through spot market sales if they can’t secure new contracts, or through competition from lower-cost producers and overcontracted intermediaries for securing new long-term contracts,” it said noting that some buyers are already seeking to reopen negotiations on their contract pricing due to changing market conditions.

The double pressure on contracted and uncontracted LNG prices from supply gluts will put financial returns at risk for Australian LNG producers, who are facing “an ever gloomier future,” the IEEFA concluded.

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