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LNG, Oil & Gas, M&A Market Intelligence Specialist

Massimo Bellino

Thematic (Sector/Industry)

Colombia Oil, gas and consumable fuels / Thematic (Sector/Industry)

After a period of low investments and declining LNG prices, the LNG industry is enjoying a new phase of growth characterized by radical changes, as emerging transformational trends are reshaping its market structure and participants, thereby generating new opportunities for value creation.
The surprise growth of LNG demand from Asia in particular from China that started in 2017, is continuing through 2018 and it is forecasted to remain robust in the coming years.
The feared LNG supply glut that was expected to weigh on the LNG market in 2017, didn’t occur. Shell CEO Ben van Beurden said during the Q4 results “The LNG glut – conspicuously absent, isn’t it? -- in fact, we see a rather tight LNG market”. A consensus is growing among LNG market participants that a demand-supply gap will become apparent post-2020.
The positive outlook for LNG has been reflected on the share prices of the LNG focused players that have been outperforming the oil majors in the last twelve months on the back of stronger LNG prices (Exhibit 1). By contrast, the LNG developers have lagged behind as increased competition and changing market structures have made it more difficult for LNG projects to take FID. At the moment there are at least 15 proposed LNG projects in the US alone and 17 globally competing for offtake deals.
The announcement by <a href="https://www.smartkarma.com/entities/22108" target="_blank" data-smartkarma-citation="entities:22108:1">Royal Dutch Shell (RDSA LN)</a> of the long-awaited FID for LNG Canada last week has been seen as a kick-off for a new wave of project FIDs expected to pick up in 2019. Shell has surprised the market with the news that no off-take deals had been agreed in advance of the FID decision. This aggressive risk-taking approach could be the winning strategy to move forward LNG projects ahead of competitors with a weaker balance sheet unable to do the same.
New technologies that allow scalable, mass-produced LNG solutions at lower cost have been slowly transforming the LNG industry. The mega projects of the past, characterized by bigger trains and higher volumes, often plagued by cost overruns and delays, have been replaced by smaller scale, more cost-efficient, phased projects.
As a result, barriers to entry in the LNG industry are becoming lower as the new wave of LNG projects require lower capital commitments, shorter time to market and less technology risk. Emerging independent US LNG players are rapidly gaining market share. <a href="https://www.smartkarma.com/entities/16683" target="_blank" data-smartkarma-citation="entities:16683:1">Cheniere Energy (LNG US)</a>, Freeport LNG, and Sempra Energy are among the top ten global LNG owners of added capacity, online and in construction, since 2016 alongside the oil majors.
Private equity investors are also among the new participants in the LNG industry. Blackstone has been one of the early entrants that correctly anticipated the significative growth prospects for LNG in the US. Its bet on <a href="https://www.smartkarma.com/entities/27381" target="_blank" data-smartkarma-citation="entities:27381:1">Cheniere Energy Partners LP (CQP US)</a> in 2012 has returned over five times the initial investment in six years. The recent failed $10.5bn takeover bid for Australian LNG player <a href="https://www.smartkarma.com/entities/711" target="_blank" data-smartkarma-citation="entities:711:1">Santos Ltd (STO AU)</a> by Harbour Energy shows that private equity funds are starting to look beyond the US for investment opportunities in the LNG space.
<h2>Exhibit 1: LNG focused players outperforming the oil majors</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/066/331/original/EX1.png?1539091160" class="editor-image img-responsive" data-smartkarma-image-id="66331"></figure>
<div class="content-caption">Source: Capital IQ, Shell 2Q18 results for quarterly JKM prices. Un-weighted index prices. LNG Integrated: Exxon, Chevron, Shell, BP, Total and ENI. Australia LNG: Woodside Energy, Santos, Oil Search. LNG Developers: Tellurian, NextDecade, LNG Ltd, Pieridae Energy.  Prices as of 4th October 2018.</div>

After a period of low investments and declining LNG prices, the LNG industry is enjoying a new phase of growth characterized by radical changes, as emerging transformational trends are reshaping its market structure and participants, thereby generating new opportunities for value creation.
The surprise growth of LNG demand from Asia in particular from China that started in 2017, is continuing through 2018 and it is forecasted to remain robust in the coming years.
The feared LNG supply glut that was expected to weigh on the LNG market in 2017, didn’t occur. Shell CEO Ben van Beurden said during the Q4 results “The LNG glut – conspicuously absent, isn’t it? -- in fact, we see a rather tight LNG market”. A consensus is growing among LNG market participants that a demand-supply gap will become apparent post-2020.
The positive outlook for LNG has been reflected on the share prices of the LNG focused players that have been outperforming the oil majors in the last twelve months on the back of stronger LNG prices (Exhibit 1). By contrast, the LNG developers have lagged behind as increased competition and changing market structures have made it more difficult for LNG projects to take FID. At the moment there are at least 15 proposed LNG projects in the US alone and 17 globally competing for offtake deals.
The announcement by Royal Dutch Shell (RDSA LN) of the long-awaited FID for LNG Canada last week has been seen as a kick-off for a new wave of project FIDs expected to pick up in 2019. Shell has surprised the market with the news that no off-take deals had been agreed in advance of the FID decision. This aggressive risk-taking approach could be the winning strategy to move forward LNG projects ahead of competitors with a weaker balance sheet unable to do the same.
New technologies that allow scalable, mass-produced LNG solutions at lower cost have been slowly transforming the LNG industry. The mega projects of the past, characterized by bigger trains and higher volumes, often plagued by cost overruns and delays, have been replaced by smaller scale, more cost-efficient, phased projects.
As a result, barriers to entry in the LNG industry are becoming lower as the new wave of LNG projects require lower capital commitments, shorter time to market and less technology risk. Emerging independent US LNG players are rapidly gaining market share. Cheniere Energy (LNG US), Freeport LNG, and Sempra Energy are among the top ten global LNG owners of added capacity, online and in construction, since 2016 alongside the oil majors.
Private equity investors are also among the new participants in the LNG industry. Blackstone has been one of the early entrants that correctly anticipated the significative growth prospects for LNG in the US. Its bet on Cheniere Energy Partners LP (CQP US) in 2012 has returned over five times the initial investment in six years. The recent failed $10.5bn takeover bid for Australian LNG player Santos Ltd (STO AU) by Harbour Energy shows that private equity funds are starting to look beyond the US for investment opportunities in the LNG space.
Exhibit 1: LNG focused players outperforming the oil majors

Source: Capital IQ, Shell 2Q18 results for quarterly JKM prices. Un-weighted index prices. LNG Integrated: Exxon, Chevron, Shell, BP, Total and ENI. Australia LNG: Woodside Energy, Santos, Oil Search. LNG Developers: Tellurian, NextDecade, LNG Ltd, Pieridae Energy.  Prices as of 4th October 2018.

LNG Industry Insight: New Entrants Gaining Market Share Amid a Tightening LNG Market (Part 1)