Can Nigeria keep up with the changing LNG market dynamics?

The global liquefied natural gas (LNG) is changing fast and how well Nigeria maintains its market share depends on how fast it adapts to the changing market dynamics. The LNG market is undergoing huge changes as the biggest ever flood of new supply is hitting the market, with volumes coming mainly from Australia and the United States.

New production has resulted in global installed LNG capacity of over 300 million tonnes a year, while only around 268 million tonnes of LNG were traded in 2016, according to Thomson Reuters data. The new capacity has also given importers more suppliers to choose from, putting pressure on major producers to grant more flexible contract terms.

Long term contracts which used to hold sway in LNG market might be giving way to spot market – trades where cargoes are delivered within 3 months of the transaction date or short term which is for a duration of not more than 4 years.

With many longer term LNG supply contracts also due to expire in the coming years, the move toward more spot trading is likely to gather pace, said Jean-Marie Dauger, GIIGNL president, an International Group of Liquefied Natural Gas Importers.

“Most buyers now pay particular attention to flexibility, in terms of destination as well as offtake obligations, and price competitiveness,” Dauger said.

Data from GIIGNL said in its latest annual review that LNG spot trading made up 18 percent of total imported LNG volumes in 2016, an increase from 15 percent the year before.

Qatar was the main source of spot and short-term volumes to global markets followed by Australia, while Nigeria did not supply as much spot and short-term LNG as in 2015 due to a lower overall output, GIIGNL said.

Spot trade volumes were estimated at around 47 million mt last year, up from 37 million mt in 2015, with the main drivers of the growth being China, India and Egypt, GIIGNL said. Combined, the three countries accounted for 30 percent or 15 million mt of the pure spot LNG volumes imported in 2016.

“Signs indicate an evolution towards a greater flexibility in [LNG] trade, and the commercial patterns are evolving as destination-free volumes increase and as new buyers and sellers join the market,” GIIGNL said.

On the demand side, while China imported 7.4 million mt of additional LNG in 2016, the country increased its spot and short-term imports by only 1.6 million mt because the rest was already covered by long-term commitments. The Middle East expanded its spot and short-term imports to 17.4 million mt in 2016, almost triple the 6.4 million mt in 2015. Egypt experienced the largest increase, absorbing an additional 4.9 million mt, primarily from Qatar and Nigeria.

The buyers’ cartel are coming

Recently, the world’s biggest LNG buyers, all in Asia, announced that they are putting together a cartel to secure more flexible supply contracts in a move which shifts power to importers from producers as oversupply grows.

Korea Gas Corp (KOGAS) said it had signed a memorandum of understanding in mid-March with Japan’s JERA and China National Offshore Oil Corp (CNOOC) to exchange information and “cooperate in the joint procurement of LNG.”

Together, the three companies purchase a third of global LNG production, giving them a strong hand to challenge restrictive contract terms that have squeezed buyers’ finances.

Influential buyers’ clubs are largely unheard of in commodity markets where it is the producers, such as the Organisation of Petroleum Exporting Countries (OPEC), who wield power, enforcing production quotas to manage prices.

Under the agreement, the buyers aim to extract concessions from producers that would give them supply flexibility, such as having the right to re-sell imports to third parties, something they are not allowed to do currently under so-called destination restrictions.

The alliance of three big buyers across three countries will put pressure on exporters such as Nigeria, Qatar, Australia and Malaysia. They prefer to have clients locked into fixed supply contracts which run for decades and make buyers take fixed amounts of monthly volumes irrespective of demand, with no right to re-sell surplus supplies to other end-users.

Nigeria’s competiveness is not also helped by the 3 LNG projects which are currently awaiting final investment decision (FID); Olokola LNG, Brass LNG and the Nigeria LNG Limited’s Train 7.