US LNG delivery to the UK, likely among the few
The long-anticipated delivery of a US LNG cargo to the UK earlier this week, heralded as a landmark event, appears unlikely to become a standard pattern of trade, S&P Global Platts data suggests.
Many industry observers predicted that low international natural gas prices would push a flood of US LNG cargoes to UK shores, known as the “market of last resort,” where they would be absorbed by the depth of the National Balancing Point market. But that has not happened.
Instead, US cargoes have arrived mostly in smaller, less-liquid markets which have offered exporters high margins for profit. In fact, since its inauguration in February 2016, Cheniere’s Sabine Pass export terminal has delivered some 45% of its cargoes to markets in Latin America.
On Saturday, the arrival of the Maran Gas Mystras, carrying US LNG, at the UK’s Isle of Grain actually resulted from a swap.
According to market informants, the US-sourced cargo was originally intended to arrive at a destination somewhere in the Middle East.
A common occurrence in LNG markets, the swap deal offered two trading counterparties a means of optimizing delivery costs based on two vessels’ locations–not the origin of their cargoes.
In this most recent case, the delivery Maran Gas Mystras in to the Isle of Grain, instead of the Middle East, offered cost saving to both parties.
US EXPORTERS TARGETING PREMIUM GAS MARKETS
Since early 2016, US exporters have delivered nearly 150 cargoes to destinations around the globe, yet less than 25% of that volume has arrived in liberalized gas markets that could be characterized as mature, such as the UK, Netherlands, Poland, Italy, Portugal and Spain, or as developing, such as South Korea and Japan.
Not surprisingly, the profit margin on cargoes delivered to less liquid markets has often exceeded margins to the UK.
Over the last year, the profit on Gulf Coast LNG delivered to West India and East Asia has exceeded the NBP by 25 cents/MMBtu and 43 cents/MMBtu, respectively, Platts Analytics data show.
Profit margins on US LNG are calculated by Platts Analytics based on the destination-market price, less delivery-terminal fees, shipping and gas liquefaction losses in addition to the standard feedstock cost of 115% Henry Hub.
Liquefaction charges, which are generally considered a sunk cost, are excluded from the calculation.
NBP LIKELY TO REMAIN SECONDARY MARKET
Over the near term, forward prices suggest the UK’s National Balancing Point, or NBP, is likely to remain a secondary market for US LNG exporters.
From August to November the forward spread between the NBP and Henry Hub is currently averaging $1.80/MMBtu. The same spread to the Platts JKMTM market, based on swap valuations, is now averaging to $2.58/MMBtu.
Even including the cost of shipping, the spread to Asia currently exceeds that to Europe by more than 15 cents/MMBtu.
Although the spread to less transparent market like Mexico is not as easily quoted, the premium on recent tenders issued by the Comision Federal de Electricidad, Mexico’s electric utility, suggest that the many US cargoes are likely to continue flowing southbound.