Global LNG outlook - Beware the false dawn ::Macquarie Research,

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Global LNG outlook
Beware the false dawn
A game of two halves
Robust near term demand growth coupled with limited new capacity and
anticipated delays to Australian project start-ups points to possible global LNG
supply shortages from 2013. Beyond 2018 however, it continues to look like a
buyer‟s market. This is both because we continue to see too many proposed
projects in the longer term but also as we anticipate slowing rates of LNG
demand growth over time as the market matures.
LNG demand – the only way is up
With few viable alternatives in the medium term, we expect LNG demand to
almost double over the course of this decade driving our 2020 LNG demand
forecast of 409mtpa which implies annual demand growth of 6.1% over the next
ten years. Post 2020, however, we expect rates of LNG demand growth to trend
down as pricing subsidies are gradually removed, emerging market GDP growth
stabilises, energy efficiency continues to improve, fewer new buyers enter the
market and as unconventional gas poses a larger threat.
LNG supply – it’s all about project delivery
We expect anticipated project delays to drive medium term supply shortages as
strong front-end-loaded demand growth contends with slowing capacity
additions. Meanwhile, in the longer term the list of proposed LNG projects
continues to grow at a pace faster than demand and faster than the industry‟s
ability to develop them. This looks set to put upwards pressure on development
costs and downwards pressure on LNG prices.
Higher cost projects selling to more price sensitive buyers
While premium traditional Asian buyers will remain important, LNG‟s demand
base is increasingly shifting towards new, more price sensitive customers just as
the supply side grapples with rising costs. As a result, while perhaps safe against
the backdrop of a tight medium term market, we nevertheless believe LNG may
struggle to preserve pricing power in the longer term.
Making hay while the sun shines
We see several stocks well placed to capture the medium term tightness
expected in LNG markets before the more challenging longer term market sets in
bringing with it increased supply-side competition and rising costs. We highlight
the following (in market cap order):
 PetroChina (Outperform, TP: HK$11.70) - While PetroChina may struggle to
pass on LNG import costs short term, it will benefit from strong Chinese gas
demand growth which is a driver of expected medium term LNG tightness.
 Chevron (Outperform, TP: US$114)
 BG Group (Outperform, TP: £17.45)
 Inpex Corp. (Outperform, TP: ¥800,000)
 Santos (Outperform, TP: A$17)
 Oil Search (Outperform, TP: A$8.25)
 Petronet (Underperform, TP: Rs142) - As an LNG buyer, Petronet is unlikely
to fare as well as the sellers in the tight medium term LNG market we see.