Global LNG trade witnessed a stellar growth in 2022, driven particularly by European demand as Russia's invasion of Ukraine meant sanctions resulting in, among other things, the sudden loss of pipeline gas. Emerging nations were also actively seeking cargoes for their soaring energy needs. The tight supply led to an unprecedented price volatility, causing significant demand destruction. What does the future hold for LNG markets and will the price volatility persist? How will Petronas LNG steer through? Petronas LNG CEO Ezran Mahadzir shares his views with S&P Global Commodity Insights Senior Editor Surabhi Sahu to answer these and other questions critical to global LNG trade.
How would you describe the dynamics in the LNG market over the past two years, particularly after Russia's invasion of Ukraine? Do you expect the price volatility to persist?
Before the Russia-Ukraine war, we went through COVID-19 lockdowns. That was also a shift. When the Ukraine crisis emerged, there wasn't enough supply to meet demand because prior to that, the price signals did not incentivize investments.
Being a long-term player in the LNG industry, we would like to see more stable LNG prices, which allow investments, and [prices that] are not too high to cause demand destruction. However, the market is expected to stay volatile in the medium term -- until new projects come toward 2026-27, with the Qatari expansion and new US Gulf projects.
The volatility makes it very difficult to predict prices but certainly I do not think they will be at the pre-COVID levels of $7-$8/MMBtu.
We also don't know to what extent the Israel-Gaza conflict would escalate. If new actors came in, you might see prices shoot up from present levels.
Given present storage inventory levels, it appears Europe is well prepared for the winter season. Inventory levels in North Asia are also healthy. We must commend the European market, both policy makers and players, for the speed at which they have increased capacity.
But a prolonged harsh weather could potentially trigger more spot market price volatility. To cope with demand and supply shocks, participants should focus on assessing that risk and strategize to mitigate disruptions.
It is also important for end-buyers to look at the situation from a long-term perspective. At the end of the day, energy security is still key.
Are shipping restrictions at the Panama Canal posing risks for Asian supply? How are players mitigating risks?
On the Pacific side, enough supply sources exist to meet current demand, particularly the historical long-term requirement of Japan and South Korea. However, with demand growth, supply to the market has become and is still slightly scarce.
That's where we, via our position in Bintulu, provide a competitive advantage because we are directly facing those markets. We don't have the risk of the Panama Canal and the region we're in is stable in terms of geopolitics.
Meanwhile, the challenges posed by the waterway have caused an uptick in LNG cargo swapping among industry players to trim risks in a volatile market as lack of investments amid growing LNG demand, uncertainty over severity of Northern Hemisphere winter and geopolitical risks lurk.
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At the end of day, irrespective of Panama Canal challenges, players should optimize their portfolio by collaborating in different ways including by swapping cargoes. Any cost savings will not only be advantageous for suppliers but will also benefit the market.
What kind of indexation would you favor when it comes to pricing LNG contracts?
I think that really depends on the market. Historically, LNG was always a conversion fuel to all.
In the company's traditional markets -- Japan, South Korea and even China -- the indexation formulas are still oil-linked, as opposed to TTF, Henry Hub, NBP in a much more liquid Atlantic market.
We are flexible so long as the prices and formula would allow a fair risk and reward, and the risks can be managed by all related parties. The formula we bring in is very much a two-way formula to solve various issues along the way.
Southeast Asia is certainly a region where we would not only like to participate in but also become a dominant supplier. The burgeoning population, economic size, need for energy and thrust on decarbonization policies in Southeast Asia means that it will be taking in more LNG and, given our geographical location, Petronas is able to supply LNG cargoes on a competitive basis.
How does Petronas see LNG's growth potential and what are some of the projects that you are excited about in this space?
In the medium and long term, we believe that the gas market will grow because it is the cleanest hydrocarbon source and a very good energy transition fuel. At the right price signals, the market will invest in future capacities.
Petronas has taken a final investment decision on a new project in Sabah -- ZLNG -- to bring in 2 million mt/year of LNG capacity by the second half of 2027.
We are quite excited about getting out our first cargo from LNG Canada. That should happen in the second half of 2024 as part of a commissioning program. There are also further opportunities to grow LNG Canada and we are in discussions to progress phase 2.
Separately, Petronas is in discussions with Argentina's YPF for a proposed LNG plant. If done properly, that could be a game changer for the world market.
Petronas also has an offtake contract with two parties in the US Gulf -- Cheniere and Venture Global.
Having new supply nodes allows us to further strengthen our portfolio globally. We can draw upon our experiences from the Pacific and apply it to the Atlantic.
How does Petronas view LNG bunkering prospects, given the push toward zero-carbon marine fuels?
We believe that the LNG bunkering market will grow. Our Pengerang regasification terminal provides a platform for reload and LNG bunkering operations. We also have a regasification terminal in Sungai Udang, Melaka, that can do reloads for LNG bunkering. We have a dedicated LNG bunkering vessel that plies in the Strait of Malacca, among the busiest shipping lanes in the world.
How is Petronas taking steps to harness cleaner LNG as it accelerates its energy transition journey?
It's important to distinguish between carbon abatement and actual carbon reduction. Carbon neutral LNG by buying carbon credits is an abatement process and we do that, having traded about six carbon neutral LNG cargoes, while also focusing on carbon footprint reduction.
At LNG Canada, the molecule itself has low carbon because it is shale gas. Along with partners, we are developing it to be among the lowest emissions LNG plant by using electrification and efficient gas turbines.
Upon completion in 2024, the Petronas LNG Complex in Bintulu will also begin shifting from old gas turbines to electrification from hydro. In addition, the company's LNG vessels are modern, fitted with new technologies and more efficient.
On the upstream side, Petronas has also taken an FID on the Kasawari carbon sequestration project offshore Sarawak. The project, which should come online in 2026, will result in about 3.3 million mt/year of CO2 capture, making it one of the largest carbon capture and storage projects worldwide.