16
LNG
INDUSTRY
APRIL
2016
Changed market conditions
When momentum was building for developing a US LNG
export sector between 2011 and 2013, it was expected
that exporters would deliver their cargoes to Asia, where
demand for natural gas was the fastest growing and the
prices were highest. With oil prices at US$100/bbl, the
Asian LNG market (heavily dominated by oil-indexed pricing
for natural gas) seemed the most lucrative for prospective
US LNG exporters. The shale gas boom had caused US
domestic Henry Hub (HH) gas prices to slump in the early
part of this decade, so even accounting for liquefaction
and transport costs, there were healthy profit margins if
the wide price differentials between US and Asian natural
gas persisted. According to SNL Financial (the energy
information provider), in February 2013, US HH gas prices
were US$3.32/million Btu, but the landed LNG price was
US$19.75/million Btu in Japan, US$19.35/million Btu
in China, US$17.75/million Btu in South Korea, and
US$15.70/million Btu in India. Even LNG prices at European
destinations afforded healthy differentials compared to US
HH, with prices of approximately US$10/million Btu in the
UK and the continent. With Japan – the largest LNG importer
– shutting down its entire nuclear capacity following
the Fukushima disaster, China and India constructing
substantial LNG capacity, and Europe seeking to diversify
from its dependence on Russia – including by building
regasification capacity – it seemed that US LNG would enter
the market sometime in the second half of the decade, at a
very opportune moment. Therefore, nearly 50 LNG export
proposals were submitted by energy companies from the US
mainland for regulators to consider.
However, in a short space of time, the outlook for the
LNG market has changed, and while this will not prevent
the US from exporting LNG, it has tempered expectations.
Japan has begun the re-start of some of its nuclear plants,
Australian LNG exports have surged ahead, and gas
consumption growth in Asian markets, such as China and
India, has slowed due to slower economic growth and
competition from renewables and coal. Meanwhile, gas
demand in Europe has struggled to recover from
post-recession lows and much of the continent’s
regasification capacity remains underutilised. Warmer
winter temperatures in recent years have also crimped gas
demand for heating in Asia and Europe.
Suddenly, the global LNG market is dealing with a glut
rather than a shortage, with substantial Australian and US
LNG capacity in the project pipeline that is expected to
enter the market by the early 2020s. This does not even
take into account LNG from other potential sources, such
as Canada and East Africa, or the fact that, in many key
markets, gas demand growth has shown signs of
weakening. In addition, the oil price collapse that began in
the middle of 2014 also contributed to the precipitous drop
in oil-indexed natural gas prices, especially in Asia. As a
result, the arbitrage opportunity, even allowing for the
concomitant fall in the US HH gas price, has drastically
narrowed. According to SNL Financial, in February 2016, HH
gas prices had fallen to just US$2.01/million Btu, but
landed LNG prices in Asia had decreased to a range of
between US$5.60/million Btu and US$5.75/million Btu in
Japan, China, South Korea and India. Prices are slightly
lower in Europe, ranging between US$4.38/million Btu and
US$5.23/million Btu in the UK, Spain and Belgium. As a
result, after taking into account liquefaction and
transportation costs, the profit margin of exporting US LNG
to either Europe or Asia is now thin, with the European
market now actually offering a slightly better return.
Riding out the tough times
The prolonged collapse in oil prices could not have come
at a worse time for US LNG exporters, as it dramatically
narrowed the difference between oil indexed prices in Asia
and Europe and the US HH price. The closer proximity of
European markets to the US means that Europe is more
likely to feature as a destination point for US LNG in
the near term, or at least until Asian LNG prices start to
show some strength again. Due to the close proximity of
Europe to the US Gulf Coast, transportation costs will be
lower compared to deliveries to Asia. Meanwhile, several
European countries, such as those in the Baltic region, are
seeking to diversify sources of supply, which will be of
benefit to US LNG exporters. In the meantime, however,
US LNG capacity already scheduled to come online will
not be fully utilised until global prices and demand growth
recovers towards the end of the decade.
In March 2016, FERC made a decision to reject an
application for the construction of the Jordan Cove LNG
terminal in Oregon, US, as well as a pipeline that would
feed the terminal with natural gas for liquefaction. In a
statement regarding FERC’s rejection of the proposal, the
project’s backers, Veresen Inc., stated that FERC appeared
to be concerned that the company had not yet
demonstrated sufficient commercial support for the
projects, and vowed to continue negotiations with
potential customers to address this concern. The surprising
decision highlighted the difficulties that future LNG projects
in North America will have in getting off the ground in the
absence of being able to attain supply agreements with
customers in a bearish market.
Conclusion
To assess the viability of major energy infrastructure
projects, such as LNG terminals, it is necessary to consider
the longer term. Nearer term gas market conditions will
probably make the sanctioning of future US LNG projects
grind to a halt, but the global demand for natural gas will
regain momentum over time, meaning that prospects
look brighter after 2020. Asian economies seek to
diversify from coal, while European economies seek to
diversify sources of supply, and this bodes well for US
LNG exporters. A dose of realism now characterises the
outlook for LNG in the US, and volume growth in the
next five years will be slower than what is expected.
Nevertheless, US LNG has established its foothold in the
global gas market, and the US is still on track to become
a net exporter of natural gas before the decade is out. The
Asia Vision
tanker sent LNG to Brazil in circumstances less
sanguine than most expected only a year and a half ago,
but US LNG is here to stay and will make its impact in the
longer term.
