LNG prices plunge amid decreased demand
The year is not ending well for liquefied natural gas producers.
Prices in Asia are down more than 40 percent from a year ago as demand is weaker than expected and supply continues to grow.
There has been some easing up on the push for coal-to-gas switching, as the economics favor the cheaper but dirtier fuel.
LNG storage tanks in Europe are full — or close to it — limiting that market.
And warm weather is cutting into winter demand.
The market is so poor that a Singaporean trader recently decided to pay a contractually required fee for a U.S. LNG cargo but not take actual delivery of the gas. The company decided it would lose even more money if it loaded up a carrier and tried to sell the LNG.
Amid all that short-term gloom, Qatar has announced it is not going to stand aside and let either Australia or the U.S. take the lead as the world’s largest LNG suppler. The Gulf nation has decided to add two more liquefaction trains — at 8 million tonnes annual capacity each — to its previous plans to expand its output with four of the mega-trains.
Instead of the original plan to boost annual capacity from 77 million tonnes to 110 million tonnes by 2024, Qatar is now targeting 126 million tonnes by 2027. The country supplied about one-quarter of the world’s LNG exports in 2018 and does not want to lose market share amid forecasts of long-term demand growth.
It has enough gas, Qatar Petroleum CEO Saad al-Kaabi told reporters in the nation’s capital Nov. 25. Based on recent exploration in the country’s huge North Field, Qatar now believes it has 1,760 trillion cubic feet of gas and 70 billion barrels of condensates — double the gas reserves listed in the BP Statistical Review of World Energy 2019 edition.
“The big get bigger and the rest of us quiver in our shoes,” said Gordon Shearer, a senior adviser at Poten &Partners in New York.
“Qatar is sending a very clear message: They are going to be the low-cost supplier of LNG,” Shearer was quoted by Reuters on Nov. 27.
The competitive threat of more gas from Qatar is a problem for LNG project developers that already are finding it harder than expected to sign up the long-term customers they need to line up billions of dollars in investments and financing.
The near-term problem of low prices could change if winter weather lights a fire to stoke demand. But for now, LNG is cheap. The spot-market price in Asia in late November held around $5.70 per million Btu, down from more than $10 a year ago.
Demand has fallen behind supply. China is witnessing its slowest economic growth in decades and India’s economy is facing headwinds too, making the argument to replace coal with more costly gas a tougher sell for policy makers, S&P Global Platts reported Nov. 20.
“No end in sight for Asia-Pacific’s growth slowdown. China says goodbye to growth above 6 percent as policymakers show welcome restraint. India’s soft patch should firm but slowly. Japan’s resilience will be tested by the global slowdown,” S&P Global Ratings said in a research note.
After several years of strong growth, Asian LNG demand is expected to grow by less than 2 percent in 2019, according to Platts Analytics, far less than the 20 percent average the past three years.
The business looked so weak in November that Singaporean gas marketer Pavilion Energy took the unusual step of canceling a cargo of U.S. LNG, even though it would still be required to pay a fee.
“Pavilion Energy evaluated scheduling and other commercial matters, then took the decision not to lift the cargo,” a spokeswoman for the company said Nov. 19.
News media reports said Pavilion was supposed to load from the Cameron LNG plant in Louisiana. Pavilion has a long-term deal with Japan’s Mitsubishi to buy LNG from the plant, which is operated by Sempra Energy. Mitsubishi is a partner in the terminal.
U.S. terminals typically sell their LNG at 115 percent of the cost of the gas that went into the plant, plus a liquefaction reservation fee of between $2.50 and $3.50 per million Btu. That fee is a sunk cost — what is known as “take-or-pay” — it still has to be paid even if buyers cancel the purchase. There was no announcement of how Mitsubishi or Pavilion would cover or share the take-or-pay fee.
This may not be the first canceled cargo of U.S. LNG. Prices for the heating and power-plant fuel may collapse in Europe and Asia next year to levels that would force U.S. suppliers to curb output, Citigroup said in a note to clients last week, as reported by Bloomberg on Nov. 24. Morgan Stanley sees as much as 2.7 billion cubic feet a day of U.S. gas exports curtailed around the second or third quarter, Bloomberg reported.
The lack of Chinese demand for U.S. gas during the trade war between the two countries, paired with near-capacity gas storage in Europe, has created a “toxic witch’s brew” that’s making it harder to find a home for American gas, said Madeline Jowdy, senior director of global gas and LNG for S&P Global Platts in New York.
There are five U.S. terminals making LNG; four more under construction; and almost 10 more with federal authorizations in hand but not enough investment, financing or customers to commit to start construction.
The Federal Energy Regulatory Commission on Nov. 21 approved three LNG export terminals in Texas. FERC only looks at environmental and safety issues, not the project economics.
Developers continue working to put together projects to meet expected demand growth later in the 2020s and beyond. Because it takes years to line up financing, customers, permits and to build the multibillion-dollar projects, there are concerns that supply could get tight if developers shy away from making commitments in the next year or two.
The swing of the investment pendulum could be felt in the 2020s.
“The supply outlook is very much a feast-to-famine situation,” Nicholas Browne, Wood Mackenzie’s Asia gas and LNG director, reported at an LNG conference in Tokyo in September.
Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He is the Atwood Chair of Journalism at the University of Alaska Anchorage School of Journalism and Public Communication.