US producers can live with low LNG prices
US LNG producers were less concerned about the low prices their commodity was fetching than they were about a supply squeeze next decade that could permanently crimp demand, they told a conference in London.
“The thing I am more worried about is if we are short of supply,” Octavio Simoes – a senior advisor to the head of Tellurian – said at the LNGgc conference.
Natural gas would “lose its natural role” to displace more carbon intensive sources of energy if supply constraints prompted buyers to decide in favour of other sources of energy in the coming years, Simoes said.
“We cannot afford supply constraints, or our customers will switch to coal and oil.”
Cheniere, which exports nearly 40% of US LNG, forecasts another 135m tonnes of new global supply will be required by 2030 – beyond investment decisions that have already fallen this year. That is equivalent to around 40% of last year’s worldwide trade in the fuel.
Paul Sullivan, global LNG leader at consultancy Worley, saw 90m tonnes of additional annual demand emerging from China and India alone in the next five years.
This was based on construction plans for LNG import facilities, and the historic rates at which the countries tended to operate them.
“Companies in China, companies in India are investing in new infrastructure to import gas. They are not going to set them up to operate at 25% – they are going to set them up to run at 80-90%,” Sullivan said. China had an import capacity of 72m tonnes at the end of 2018.
Many observers expect LNG producers to make a record number of final investment decisions this year to cash in on the expected supply shortage next decade.
Yet gas prices are coming under pressure just as producers hunt for the supply deals to justify these projects.
Global LNG supply has been growing more steeply than demand since September 2018, slashing gas prices in Europe and Asia and even shaking up conditions for long-term supply deals.
This has squeezed margins for companies that have built a business model around exploiting the arbitrage between cheap US gas and more expensive prices globally.
Gas for November delivery on the Dutch TTF hub was last seen trading around EUR 15.90/MWh, down nearly 40% relative to this time last year – and the plunge has been even more pronounced on the day ahead. This was last seen trading just above EUR 8/MWh.
By comparison, US Henry Hub gas prices were trading around EUR 7/MWh – leaving LNG exporters little room to make money after chilling and shipping their product.
No shut-ins yet
Europe – a market of last resort for LNG – had “theoretically” reached levels low enough to challenge the operating costs of US exporter “several times” this year, said Sam White, director of commercial structuring at Cheniere.
Yet the prospect of prices falling so low they would shut in US production amounted to a circular argument, he added, given the importance and competitiveness of US supply. This was set to account for 46% of the Atlantic basin trade by 2022, according to Cheniere.
“Shut-ins would both send Henry Hub lower and send LNG prices higher, so you may balance along that level, but it is fairly unlikely.”
Other US exporters were less concerned by the implications of the present glut.
“When your baby is crying and full, you don’t want to give it more food,” said Vivek Chandra, head of Texas LNG. “Right now the baby is quite full. Let it sit there, when it’s hungry, it will come back.”