Peak LNG revisited: Concept divides industry outlooks as long-term deals surge

• Gas Strategies Central Case global LNG demand projection anticipates peak of 745 mt reached in 2040
• Shell outlook shows no forecast beyond 2040, BP only offers high fossil fuel and net zero scenarios
• OIES long-term gas outlook takes bearish view of LNG demand peaking in early 2030s in all scenarios
• Divides views on maximum demand taking place as portfolio players lead surge in long-term deals

In April last year, LNG Business Review published an article on the subject of “peak LNG”. It addressed the issue of how likely it was that LNG demand would not grow for ever, but would peak in the foreseeable future, and, if it did, what would be the consequences.

Last year’s article highlighted that the issue was shrouded in much uncertainty. In the first instance, there is a wide range of possible LNG demand scenarios, each of which has a different timing and severity of any peak in demand. Secondly, in terms of consequences, a peak in LNG demand may lead to low prices (if overcapacity is locked in) or high prices (if it becomes increasingly difficult to finance new LNG projects as the peak in demand approaches).

Since the article was published, there has been something of a surge in the signing of long-term LNG sale and purchase agreements (SPAs), with the large portfolio players being the largest set of buyers under these contracts. Gas Strategies estimates that around 40% of the “buy side” of new LNG SPAs since the beginning of 2023 can be accounted for by portfolio players, despite only ~15% of the “sell side” being accounted for by those portfolio players. This may suggest that this set of buyers, at least, are not worrying too much about a lack of demand for them to resell volume commitments which will last well into the 2040s.

In this article, LNG Business Review takes another look at the peak LNG concept and asks whether the industry is behaving like it believes in it.

Unbroken record

The term “peak LNG” recalls the term “peak oil” that was very current in the second half of the 20th century and was used to describe the phenomenon, which was predicted – and then observed – in the US, whereby world oil production would peak because of resource depletion. Thanks to improved technology, particularly in extraction of shale oil and gas, we do not now worry about a peak caused by the world running out of oil.  The term is currently more often used to describe a demand-related peak caused by the move away from fossil fuels.  

It is worth bearing in mind that, in fact, on a global level, oil has not peaked, and neither has coal – and certainly not gas or LNG. The LNG industry, in fact, has a pretty much unbroken record of growth on a global basis, with volume growth over the last decade averaging 5.3% – compared to 0.95% for oil, 1.92% for natural gas and 1.07% for coal – a remarkable record for a fossil fuel.

However, on a national level, LNG demand has already peaked in some countries. There are over 40 LNG importing countries, and all are at different levels of maturity. Some, such as Japan, have probably already reached their peak of LNG importation, and the future is one of decline.

In Europe, imports fell back in 2023, and continued to fall in H1 ‘24 – although it is possible that European LNG demand may peak again between 2030 and 2035, with declining production from the UK and the Netherlands and falling pipeline imports from Norway and Algeria, before entering terminal decline.

Europe and Japan alone accounted for 47% of total LNG imports in 2023.

South Korea  makes up a further ~11% of global LNG imports with a demand outlook that is fairly flat, with a longer-term prospect of decline.

China accounts for a further ~18% of current LNG imports. While Chinese LNG demand is not yet at a peak, growth has been more hesitant in recent years, with both 2022 and 2023 imports being below their 2021 levels.  With LNG being the marginal gas supply – after indigenous and pipeline gas – and amounting for less than a quarter of China’s gas requirement, it will inevitably bear the brunt of any turn-down in China’s gas consumption and be potentially negatively affected as Chinese indigenous production and imports of Russian pipeline gas ramp up over the next decade.

But the real growth prospects for LNG are, of course, in South Asia and south-east Asia. Global LNG demand will peak when growth in these markets can no longer compensate for stagnation and decline in the more mature markets. In Gas Strategies’ Central Case for global LNG demand, this occurs around 2040, with the market trending down then from around double the current size.

With so much of the growth coming from relatively new markets, there is plenty of scope for forecasts to differ. This range in the projections was pointed out in LNG Business Review’s April 2023 article – and in the intervening period, the range of uncertainty has gotten wider.

Demand horizon

In February this year, Shell came out with its 2024 LNG outlook which, as usual, reviewed long-term projections for supply and demand. Its graph showed a range of consultant demand forecasts which show uninterrupted growth and reach between 625 mt and 683 mt by 2040, lower than Gas Strategies’ Central Case.

However, Shell does not show forecasts beyond 2040. In fact, it has been using 2040 as the time horizon for demand forecasts in its LNG outlook since 2020, meaning it has progressively shortened the period for which it shows forecasts. In addition to the consultant forecasts, Shell also includes the International Energy Agency’s (IEA) Net Zero (NZE) and Announced Policies (APS) scenarios, which show a peak in LNG demand, but does not comment on these.

Shell does not refer to any prospect of peak LNG but does note that global gas demand is expected to peak “after 2040”.

In April, a few weeks after the Shell outlook came out, the Oxford Institute for Energy Studies (OIES) published a presentation on the long-term outlook for natural gas under its main energy scenarios. This included projections for LNG demand.

The most optimistic of these scenarios from the perspective of LNG is the Declared Policies Scenario (DPS), which OIES says is akin to the IEA’s STEPS scenario, both being a species of “business as usual” scenario. This DPS scenario shows global LNG trade peaking at some 562 mt in 2030, and the OIES notes that LNG peaks in the early 2030s in all of their scenarios.

The OIES projections, if they turned into reality, would be somewhat shocking for the state of the LNG industry. With global LNG imports having been 401 mt in 2023, and with some 219 mt of new capacity currently being under construction, they would suggest that the world already does not need new LNG capacity, and that the LNG industry is heading directly for overcapacity.

Against this backdrop, BP’s energy outlook 2024, which was published in July, was eagerly awaited. As noted in LNG Business Review’s April 2023 article, BP’s 2023 energy outlook then showed LNG demand peaking in all three of its scenarios. However, the BP outlook published this year did not throw any light on the peak LNG issue, because BP now only shows two scenarios, one of which is a high fossil fuel, “business as usual”, scenario and the other is a net zero scenario, with nothing in between.

In the case of LNG, this produces a high case similar to the 2023 high case. But with demand in the last few years having been pushed up since the last energy outlook edition to around 724 mt, this eliminates the slight peak which previously occurred in the mid-2040s. The net zero case still shows an almost immediate decline to around 220 mt in 2050.

The latest BP scenarios obviously show a huge range of outcomes, and BP seems now to content itself with pointing out the yawning gap between net zero ambitions and the path the world is actually on. But it is interesting to wonder whether this shying away from committing to any central case also has a business motive.

IEA focuses on LNG demand

The next set of LNG scenarios to emerge came from the IEA, whose 2024 World Energy Outlook (WEO) appeared on 24 October. This edition of WEO pays a lot more attention to LNG demand than its predecessors, devoting a section to “LNG oversupply”.

The IEA is clear that it thinks that the wave of new capacity under construction is going to lead to a period of oversupply and low prices which will stretch into the 2030s. But interestingly, the IEA does not show peak LNG in all three scenarios. The STEPS scenario shows global LNG demand continuing to increase to 2050, with new LNG capacity needed from 2040 – though not before.

However, the IEA’s demand forecast, even in this STEPS case, is significantly lower than the industry projections referred to above, reaching only around 550 mtpa by 2040.

Long-term commitments

It would be reasonable to ask how much it really matters if there is a peak to LNG demand. Forecasts are always wrong – and is it not the level that demand reaches that is the most important thing? This would be a valid challenge in the case of the oil market, which structurally already has overcapacity, and where the Organization of the Petroleum Exporting Countries (OPEC) tries to manage output.

However, the LNG business has never been faced with structural – or permanent –  overcapacity, such as we would inevitably see if LNG demand peaks, and LNG has no OPEC to manage things. The consequences of this would be structural changes in the market and potentially an era of significantly lower prices. Moreover, some of these changes may start to occur significantly before peak LNG is reached, particularly as investment in new capacity becomes more challenging. These points are developed in a lot more detail in a parallel Viewpoint, soon to be published by Gas Strategies.

Taking the Gas Strategies Central Case for occurrence of peak LNG in 2040, rather than the significantly earlier peaks in the OIES, IEA or pre-2024 BP scenarios, the point of maximum demand occurs within the timescale of long-term SPAs being signed right now, and also within the timescale of the finance of LNG projects being actively developed. It would be reasonable to ask what impact considerations of the advent of peak LNG are having on the long-term decisions that SPAs and liquefaction plant final investment decisions (FIDs) entail.

Concerning liquefaction plant investment, there is no real sign that the prospect of overall LNG demand peaking and then declining within the course of the investment is actually acting as a brake on investment. To be sure, with the US Biden Administration’s pause on approvals having an effect, there has in any case been a slow-down in FIDs, but none of this is due to long-term concerns about demand. The obvious reason for this is that it remains very much the case that LNG projects take FID only when they have the large majority – usually 90% or more – of their volumes secured on long-term contracts. If the project is being project financed, these contracts will need to cover the period of the loans.

So the question really comes down to the commitment to long-term contracts, and so far there is no sign of a falling off in appetite for new contracts.

The surge in new contracts has been impressive. In total, 61 new long-term SPAs were announced in 2023, with a total ACQ (annual contractual quantities) of at least 71 mtpa (there is no available ACQ data for six of the agreements). At the time of writing, 37 long-term SPAs have been publicly announced in 2024 – totalling at least 47 mtpa (there is no available ACQ data for two of the agreements).

There is also no indication that the duration of contracts is decreasing – which might be expected if buyers were worrying about longer-term demand. According to GIIGNL, the weighted average duration of the long-term contracts signed in 2023 was 19.3 years, roughly the same as in 2022, but significantly above what it had been in previous years (for example, 15.3 years in 2021).

The average was no doubt boosted by seven new Qatari contracts concluded in 2023 with durations of 27 years, but aside from that, non-Qatari contracts of duration 15-20 years made up the largest category reported by GIIGNL, which counts any contract above four years duration as being “long-term”.

But these trends, however notable they have been in recent years, may not necessarily continue to persist.

There are several points to pick out of these interesting statistics on recent long-term contracts. Firstly, there are the Qatari contracts themselves. This phenomenon of 27-year contracts seems to be something of an innovation introduced by Qatar in the last couple of years. It is hard to escape the conclusion that Qatar Energy is now looking to lock-in offtake as far out into the future as possible. And with much of Qatari volumes oil-price linked, Qatar Energy will also have a hedge against over exposure to spot prices.

Commercial bridge

Another interesting point is the activity of the portfolio players in LNG contracting over the last couple of years. Portfolio players and traders were on the buy side of some 42% of the volumes contracted on a long-term basis since the start of 2023, and on the sell side of 17%. This shows how important portfolio players have become as a commercial bridge between the liquefaction facility, which requires long-term contracts for finance, and the end-use buyers, who have increasing reluctance to sign long-term contracts.

The portfolio players – of which the largest are the IOCs, like Shell, TotalEnergies and BP – see this structure as being the core of their LNG business, and they appreciate the value of economy of scale. They are now keen to be buyers from the LNG projects that they are investors in, and are also active buyers from third-party projects. Of the seven 27-year contracts Qatar concluded last year, five were with IOCs.

The general approach that the portfolio players are adopting – for the moment at least – seems to be to take a long position: the GIIGNL statistics show this, with the portfolio players being much more present on the buy side than the sell side. To what extent these purchases have been placed with firm buyers – or will be, before the contracts come into operation – is not clear.

This suggests that it is increasingly the portfolio players who, collectively, are the ones that match supply with demand, and who bear the risk – or the profit – if supply and demand go out of kilter. This led to very big profits in 2020, and may lead to some pain in the short term as a supply surge hits the market from the end of 2025. Whether they are structurally exposed in the longer term it is too early to tell – they would surely feel that they have sufficient time to liquidate their long positions before peak LNG occurs.

The real risk for the market is that the active contracting behaviour of portfolio players – and the fact that they are largely adopting long positions – could be masking a softening of actual downstream demand, allowing for it to be true that LNG contracting appetite is still strong, while peak LNG considerations play on the minds of consumers.

The fact is that, in a peak LNG scenario, the market as a whole will likely be long on capacity – and whoever is exposed to spot market prices will likely find this to be painful. Perhaps this is one of the reasons that Shell and BP have sidestepped the peak LNG issue in their respective outlooks. - DJD