Freeport LNG outage showed growing connection of US supply, global gas market

Freeport’s return to producing LNG and exporting cargoes marked the end of the biggest outage in US LNG export history, a milestone for US natural gas that led to widespread market impacts and illustrated the importance of a US LNG terminal as a cog in the global energy system.

The unexpected shutdown of the Freeport terminal following a June 8 explosion and fire had opposite effects on the global and US gas markets, while demonstrating how significantly the US connection with global gas markets has grown. Internationally, the outage initially worsened supply constraints that sent sky-high spot prices even higher. In the US, the loss of more than 2 Bcf/d of feedgas demand for Freeport tanked surging domestic prices and helped enable storage inventories to refill ahead of the winter.

But market dynamics changed dramatically in the eight-months that Freeport remained offline.

“The return of Freeport volumes is a bullish factor for US markets and a bearish factor for international ones,” Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights, said in an interview. “The return of Freeport LNG is expected to be the single largest supply addition to the global LNG market in 2023 relative to 2022.”

As Freeport ramps up to full operations, its return stands to ease tightness in the global gas market, while cutting a US supply overhang that is weighing on domestic prices.

Freeport has shipped four partial cargoes since Feb. 12, using LNG that was in storage the 15 million mt/year capacity terminal was forced offline. On Feb. 21, Freeport received regulatory approval to return two of the facility’s three liquefaction trains to service.

Freeport announced the same day that it had already achieved the first LNG production since the outage and that it expected to reach three-train production of about 2 Bcf/d “over the next several weeks.”

But the ramp-up underway at the Freeport comes at a time of depressed LNG prices amid robust gas storage levels in Europe following a warm winter and relatively tepid demand in Asia, even though global LNG prices remain high relative to historical norms.

The Platts Gulf Coast Marker for US FOB cargoes loading 30-60 days forward was assessed at $12.10/MMBtu Feb. 22, down from more than $70/MMBtu in August 2022.

Supply risks
When Freeport went offline, persistently high prices were encouraging the seven major US LNG facilities to run close to full bore. The majority of US cargoes were flowing to Europe, which was scrambling to find alternatives to Russian pipeline gas deliveries following the invasion of Ukraine. That pull on US LNG has continued.

“We are going to have to run this system pretty close to its capacity for years, and that creates just a host of mechanical risks,” Joseph Majkut, director of the energy security and climate change program at the Washington-based Center for Strategic and International Studies, said in an interview.

The Freeport outage also underscored the risks of failure-induced shortages that could come from cyber attacks or disruptions associated with hurricanes, with US export facilities largely concentrated in the Gulf Coast, Majkut said.

‘A game changer’ for the US

Globally, a major LNG plant getting knocked offline is not that unusual. But the US market had never experienced such a prolonged outage of a major US LNG export terminal like Freeport, which represents one of the single largest sources of domestic demand.

The outage was “a game changer” for the US that will likely still be talked about a decade from now, said Phil Flynn, senior account executive at Price Futures Group.

“Its timing really shook things up for a long period of time and in a way, it kind of helped save the US market from being undersupplied,” Flynn said in an interview. “Even with the warm winter, without Freeport there would be no way that we would be trading this cheap on natural gas. Its market impact is still being felt.”

So far, the US gas futures market has largely shrugged off bullish news from Freeport in the face of bearish supply-demand factors that include a rising storage surplus and a mild weather outlook. NYMEX Henry Hub prices are hovering around $2/MMBtu, having pulled back from highs near $10/MMBtu since late August.

Freeport was scheduled to receive about 473 MMcf/d of feedgas Feb. 22, based on nominations for the morning cycle that could later be revised, S&P Global Commodity Insights data showed.

“It’s definitely a positive,” Flynn said. “But let’s put it this way: The impact to the market was a lot more severe when it shut down than the impact will be when it reopens, because reopening is going to take some time, and it’s starting to reopen during the shoulder season anyway.”
Source: Platts