There are no shortages of changes to commodity markets as a result of increased unconventional gas and oil, many of which are tied to long-time hydrocarbon-importing countries like the U.S. becoming net exporters.

The most obvious example of this type of change can be found in the global LNG market where the U.S. and Australia are forecast to become the largest exporters in the next decade. As volumes from these countries hit the market, they are creating an oversupply.

“There is no shortage of new capacity vying for market share,” said Nelly Mikhaiel, senior consultant at Nexant, as part of a panel on LNG markets at the recent U.S. Energy Information Administration’s (EIA) Energy Conference in Washington, D.C.

However, the panel agreed that the market is likely to be balanced by 2020. Mikaiel said that the trend may reverse in the next decade with demand exceeding supply by 2024. This projection is based on existing global liquefaction capacity combined with capacity under construction.

Besides the U.S. and Australia, Nexant anticipates multiple countries and regions that will seek to fill the forecasted supply shortfall, including Canada, East Africa, West Africa, Russia, Qatar and Papua New Guinea.

According to Mikaiel, Australia will be the largest exporter of LNG by 2020 with approximately 86 million tons per year of export capacity with the U.S., Canada and East Africa making the largest gains in market share. Russia may struggle to gain market share, despite having 44 million tons per year of planned capacity, as several of these projects may struggle to come online before 2030, she said.

Japan has been the largest new consumer of LNG in the wake of the 2011 Fukushima nuclear disaster, which resulted in greater usage of LNG as electric generation fuel, but this growth is expected to slow. Mikaeil said that post-2025, the differentials between contracted and spot prices will narrow as competition increases and growth slows.

Though Australia has the location advantage to Japanese markets, capacity from the eastern portion of the country are among the most expensive due to production costs that are even greater than those found in Western Canada.

By comparison, Qatar will have the cheapest cost stack with U.S. production from Louisiana being in the mid-range. It is likely that the U.S. will fill much of the supply gap, she said, because of its location and vast infrastructure.

Mikaeil noted that Australia faces multiple headwinds: high project development costs with a history of delays; oil-linked, long-term deals that are necessary to provide solid netbacks; a track record of limited industry collaboration that would reduce prices because of competing interests.

These can be overcome by focusing on low-cost plays, creating new markets, improving cooperation efforts and expanding domestic markets that may provide netbacks comparable to exports.

According to Keo Lukefahr, general manager of natural gas at PetroChina International (America) Inc., LNG markets must undergo further changes to compete with renewables. “Most of the new LNG volumes are being used as a substitution fuel to compete in the clean energy arena against alternatives. This is occurring as alternatives are increasing in availability and rapidly decreasing in cost,” she said.

Consequently, it is important for sellers to move away from oil-linked contracts. “Oil-linked pricing is a relic and nonsensical. It is an artifact of a time when LNG was scarce, gas was largely from oil-linked associated production, and there was a significant amount of oil substitution in the demand pool,” Lukefahr said.

While oil prices are expected to recover, it is unknown when this recovery will take place and arbitrage opportunities out of Asia and Europe have been negatively impacted. This will require LNG export markets to change, according to Ernie Megginson, president of Megginson & Associates Inc.

“LNG markets haven’t really changed in 30 to 40 years,” he said while adding that it is time for more flexible, smaller projects rather than world-scale projects being the norm. As an example, he noted that LNG projects in the U.S. have predominantly been large-train ones with eight projects, including Cove Point, Lake Charles, Gulf, Sabine Pass, Rio Grande, Cameron, Golden Pass and Corpus Christi, representing more than 150 million tons per year of capacity.

Megginson said that developers are beginning to realize that there are further opportunities available by focusing on smaller capacity with mid-scale trains, such as the Southern, Magnolia, Calcasieu Pass, Annova and Driftwood projects.

By focusing on lower costs, developers are able to offer customers with more flexible terms. “Competitive market conditions and mature construction capabilities in the U.S. are driving project sponsors to consider newer, lower-cost and higher-efficiency liquefaction technologies, benefitting customers,” he said.

According to Lukefahr, LNG suppliers need to build a model with year-on-year price reductions to maintain competitiveness while providing highly competitive rates that can be locked in as part of the baseload energy mix.

“We don’t have an oversupply of LNG per se, but an oversupply of expensive LNG. It needs to compete with wind, solar and even coal, not just oil. Competitively priced LNG from high quality suppliers will find buyers,” she said.

Frank Nieto can be reached at fnieto@hartenergy.com.