Global LNG poised for ter­ri­ble year

Muscat Daily - - BUSINESS -

Sin­ga­pore - Liq­ue­fied nat­u­ral gas (LNG) prices are poised to test record lows this year thanks to an on­slaught of new sup­ply and warmer win­ter tem­per­a­tures curb­ing con­sump­tion.

The startup of new ex­port projects from Aus­tralia to the US has flooded the mar­ket, while brim­ming stock­piles in Eu­rope and an ex­pected slow­down in Chi­nese de­mand have dumped cold wa­ter on con­sump­tion prospects. LNG for spot de­liv­ery to North Asia is on track to hit an all-time low this sum­mer, while gas prices in Eu­rope and the US are trad­ing at the weakest sea­sonal lev­els since 1999.

“The out­look for nat­u­ral gas over the next year or so isn’t great,” said Marco Du­nand, CEO of trad­ing house Mer­cu­ria En­ergy Group Ltd. “There’s a sur­plus al­ready in the US and Eu­rope. And the mild win­ter in Asia means an­other sur­plus is build­ing up there,” he said in an in­ter­view. Mer­cu­ria jumped into LNG trad­ing last year with hires from EDF Trad­ing Ltd.

This is what the rock-bot­tom prices mean for the in­dus­try:

Amer­i­can halt

US gas ex­ports have surged amid the na­tion’s shale boom, but plum­met­ing prices may now throt­tle back ship­ments or en­cour­age sus­tained main­te­nance while firms weather the storm. Pro­duc­ers and com­pa­nies with off-take agree­ments may de­cide not to load car­goes be­cause prices are too low to earn a profit af­ter ac­count­ing for ship­ping costs.

“The global over­sup­ply of LNG has been build­ing and build­ing and build­ing,” said Ron Ozer, founder of gas-fo­cused hedge fund Statar Cap­i­tal LLC in New

York. “The gas mar­ket can’t stom­ach the over­sup­ply and warm weather, and it’s get­ting both.”

With car­goes from the Gulf of Mex­ico cur­rently priced around US$2.65 per mil­lion Btu, cash mar­gins are pos­i­tive only be­cause of weak US bench­mark prices, ac­cord­ing to Robert Sims, an an­a­lyst at Wood Macken­zie Ltd. There’s a chance that pro­duc­tion could be re­duced if the spread be­tween bench­mark Henry Hub and US Gulf LNG nar­rows 25 cents, he said.

Tor­b­jorn Torn­qvist, CEO of Gun­vor Group Ltd, the big­gest in­de­pen­dent LNG trader, sees the mar­ket about 50 cents away from shut downs. “We can see even lower prices in the next few months,” Torn­qvist said in Davos. “The sup­ply and de­mand bal­ance doesn’t look good.”

US car­goes are seen least prof­itable in Asia in April, and in Eu­rope in July, Anna Borisova, an­a­lyst at BloombergN­EF said.

Con­tract scru­tiny

Buy­ers may de­mand re­vi­sions to long-term sup­ply con­tracts, such as bet­ter pric­ing or the re­moval of re­stric­tions on re­selling car­goes. Ja­pan’s Osaka Gas Co has al­ready taken ac­tion, mov­ing an Exxon Mo­bil Corp-led LNG jointven­ture to ar­bi­tra­tion in a bid to get lower rates.

Qatar, one of the world’s big­gest sup­pli­ers may be show­ing some flex­i­bil­ity. The sup­plier has started of­fer­ing more com­pet­i­tive price links, with the low­est seen to Korea Gas at 10.8 per cent the price of oil, ac­cord­ing to FGE, an en­ergy con­sul­tant. That com­pares to 2008, when Qatar signed con­tracts with Chi­nese firms in the 16 per cent range.

In­vest­ment de­lays

Af­ter four years of belt-tight­en­ing, the amount of in­vest­ments last year in new pro­duc­tion ca­pac­ity set a record. Com­pa­nies in­clud­ing Qatar Pe­tro­leum, No­vatek and Ven­ture Global LNG Inc sanc­tioned new plants from the US to Rus­sia.

But the cur­rent wave of ad­di­tional sup­ply and per­sis­tent weak global prices is chal­leng­ing new projects seek­ing fi­nal in­vest­ment de­ci­sions, ac­cord­ing to Mor­gan Stan­ley. The bank re­duced its out­look for the num­ber of projects reach­ing FID and re­vised lower its new sup­ply out­look for the mid­dle of the decade. The low price en­vi­ron­ment will also likely force Qatar to stag­ger or post­pone its planned 64 per cent ca­pac­ity ex­pan­sion, cur­rently sched­uled by 2027, ac­cord­ing to FGE.

Profit pain

Weak prices mean more pain for global en­ergy ma­jors in­clud­ing To­tal and Eni, who have seen prof­its from gas-re­lated busi­nesses dwin­dle. Some Eu­ro­pean util­i­ties - who face mount­ing crit­i­cism for their use of fos­sil fu­els - may de­cide to fol­low peers that are ditch­ing LNG al­to­gether. Den­mark’s Orsted A/S cited loss-mak­ing LNG op­er­a­tions for its de­ci­sion to sell the busi­ness to Glen­core Plc at the end of last year, while Spain’s Iber­drola SA com­pleted its exit this month.

The sun­nier side

Royal Dutch Shell Plc, the big­gest trader of the fuel, has been able to stave off losses on LNG through con­tracts linked to oil, while lever­ag­ing the weak spot mar­ket. Most long-term LNG con­tracts are linked to the price of crude, which puts them about twice as ex­pen­sive as prompt car­goes sourced on the spot mar­ket.

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