Mr Noel Tomnay, Head of Global Gas & LNG research for Wood Mackenzie sets the scene: "The last LNG oversupply between 2008-10 came about when Qatar ramped up its LNG output and the market had to absorb 50 mmtpa of new LNG, at a time when demand growth had slowed. As a result, gas spot prices in Europe traded under US$4 per million British Thermal Unit ($/mmbtu) through the summer of 2009 and with no market in Asia, those prices were still enough to attract LNG cargoes to Europe, including from Australia."

"The LNG market is facing another oversupply which is likely to be deeper and will persist for some years. Prices in Asia will be lower than in Europe, and at their worst, between 2017-19, while prices in Europe will not reach a low point until 2020. The key question the industry is wrestling with is: how low will prices go?" Mr Tomnay asks.

Wood Mackenzie's report , titled 'Global gas prices – what will set the floor?' asserts that China's market policies will be key. While more new LNG markets will emerge with lower gas prices, particularly if oil prices climb, more liberalised market conditions in China could enable it to absorb a lot more LNG, mitigating the impact of the LNG oversupply on price. This includes improved regasification infrastructure access, reductions in regulated gas prices and allowing the curtailment of high cost indigenous gas. Mr Tomnay elaborates: "It is likely that output from some high cost gas will be curtailed but protectionist measures will restrict China's willingness to fully replace indigenous gas with lower priced LNG, dampening the potential supply response."

New demand for gas and LNG could be created through the displacement of coal in power generation, a theme which will be central to Mr Tomnay's presentation at Gastech 2015's Market Outlook session on Wednesday. The gas price at which coal will be displaced, a soft floor for gas prices, will be determined, in part, by the price of coal. "Assuming higher ARA coal prices in Europe of US$70/tonne and Japanese coal prices of US$80/t (CFR), a floor price for gas in Europe and Asia should be maintained at prices above US$5.00/mmbtu. This should be sufficiently high to avoid US LNG being shut-in," Mr Tomnay explains.
However, lower coal prices, possibly a consequence of reduced demand through displacement by gas, risks pulling both gas and coal prices down further Wood Mackenzie says. "At prevailing ARA coal prices of US$50/t and Japanese coal prices of US$60/t CFR, a floor price for gas in Europe and Asia could go down to prices at which many US LNG exports fail to cover cash costs, around US$4/mmbtu. This would force US LNG exporters to consider shutting-in for periods, a move which would depress US gas prices," Tomnay adds.

Lastly Mr Tomnay explains why the behaviour of major suppliers, most notably Russia, will be key: "We could see major suppliers withdraw gas from the market, thereby supporting LNG spot prices. It was Gazprom's withdrawal of 20 bcm per annum of pipe gas from Europe between 2008-10, equivalent to 15 mmtpa of LNG, that prevented spot prices from remaining low. At periods of severe oversupply, Russian gas supply behaviour will again be key to gas price formation in Europe – and this time in Asia and even the US too."
Source: Wood Mackenzie