Supply dynamics are changing liquefied natural gas (LNG) markets, especially in the Asia-Pacific region that accounts for two-thirds of global LNG demand. From an era of limited natural gas supply and record high prices exceeding $20 per million British thermal units (MMBtu) due to increased LNG demand from Japan, the world’s top LNG importer, in the aftermath of the 2011 Fukushima nuclear disaster and the subsequent shut down of the country’s 50 nuclear plants needed for electricity generation, Asian spot prices are down by nearly 60 percent.
Asian spot LNG prices for May delivery dropped last week from $7.45 per MMBtu to $7.10 per MMBtu. Media reported that the price drop comes amid more gas supply from Indonesia and Malaysia, outweighing demand in several Asian countries.
Moreover, spot prices as well as prices for long-term supply contracts – usually for a period of 20 years – will likely continue to drop due to additional supply from new LNG projects coming on stream as well as repressed global oil prices. LNG prices in Asia are usually linked to the price of oil or a basket of oil products. Global oil prices have dropped more than 50 percent since mid-June.
A note published last week by Bank of America Merrill Lynch agrees. The report said that “a spate of new LNG supply is slated to be brought online in the coming months, just when the market really doesn’t need any more, which makes for a frosty outlook for liquid gas.” The report added that “with nuclear plants coming back online in Korea and Japan and China’s economic growth weak, the destiny for LNG cargoes has tilted away from Asia and toward Europe as Asian prices have converged with those at the National Balancing Point.”
Moody’s Senior Vice President Mihoko Manabe said the drop in international oil prices relative to US natural gas prices “has wiped out the price advantage of US LNG projects, reversing the wide differentials of the past four years that led Asian buyers to demand more Henry Hub-linked contracts for their LNG portfolios.” Manabe makes a valid point. Not only are LNG prices dropping and unable to find a floor, Henry Hub (HH) gas prices are also plunging. Front-month futures price for HH averaged $2.67/MMBtu so far this month, a decline of 42.1 percent year-on-year and the lowest average for April since 2012.
Cheniere’s Sabine Pass LNG terminal on the US-Gulf Coast, the country’s first LNG export terminal to be built in over 40 years, is scheduled to export first gas by the end of the year, but will have problems in this low gas-price environment. A Seeking Alpha report three weeks ago said that Cheniere’s cost of $10.60/mcf gas delivered to Asia looks too high. “Even if we haircut that by $2.50/mcf to reflect lower US gas prices (-$1) and a lower liquefaction fee (-$1.50) you get a price of $8.10/mcf,” the report said. The problem, however, is that price is still above current Asian spot prices.
The report added that the shipping cost of $2.50/mcf represents a “formidable barrier in a low price environment.” In this scenario, Australia’s mega-LNG projects’ marginal costs are lower after shipping and will have an advantage in a lower price environment. “US export marginal costs of about $8.10 in a $3 US gas price environment will cap spot market prices to China, but Australian producers will get the volumes,” the report said.
Lower gas prices are already causing numerous US-based LNG project developers to either postpone or cancel their plans. Moody’s said that low LNG prices will result in the cancellation of the vast majority of the nearly 30 liquefaction projects currently proposed in the US, 18 in western Canada, and four in eastern Canada.
However, LNG project proposals that can weather the low price storm should be able to go forward. Global oil prices will likely find a floor, in at least the medium term, and trend upward again as the US rig count from shale plays continues to drop and production declines eventually set in, thereby helping to offset the current global oil supply glut. As oil prices trend upward, oil-linked LNG prices in Asia will increase accordingly and new LNG projects can lock in long-term offtake agreements at more favorable prices.
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