Falling US LNG competitiveness threatening projects

According to Business Monitor International (BMI), the falling price of global oil benchmarks is having a deflationary impact on LNG contracts linked to crude. Japan’s Ministry of Energy, Trade and Industry (METI) reported that LNG price in December 2014 averaged just US$11.6 per million Btu, while Asian spot prices in early 2015 have fallen under US$10.0/million Btu. This will have two major impacts on the global LNG sector.

US LNG, which had been sought due to its contract structure linked to Henry Hub prices as opposed to oil, will become less competitive with oil indexed LNG projects.

Major greenfield LNG projects, particularly those that have experienced significant cost overruns in Australia, will be far less profitable.

US losing competitiveness

The impact of the crude oil rout over the first half of 2014 has seen the spread between Henry Hub gas prices and oil linked LNG prices significantly narrow. The difference between the two pricing structures has halved to approximately US$7.0/million Btu from US$14.0/million Btu in mid-2013.

BMI’s forecast for a sustained lower oil price over the next five years, and a restrained Henry Hub price over the same period, suggests that the spread between US natural gas prices and Asian LNG prices will remain lower for some time.

The bulk of US LNG contracts are based on the Henry Hub price, plus liquefaction insurance and freight, as well as integrated profit. According to calculations from EY, BMI’s US$55/0/bbl Brent price forecast for 2015 would translate into a cost of approximately US$9 – 9.5/million Btu for US Gulf Coast LNG to be shipped to North East Asia, assuming a Henry Hub price of US$3.0/million Btu. With Henry Hub prices at US$4.0/million Btu this could rise to approximately US$11 – 12/million Btu higher than current Asian spot LNG prices.

This is unlikely to have a significant impact on LNG developments in the US that have already contracted out the majority of capacity. Much of the capacity at US LNG facilities with FERC and DOE approval has already been taken up.

However, BMI expect terminals yet to get full export approval from the US authorities to struggle to find buyers to support investment. This could impact as many as 14 LNG project proposals in the IS, with a liquefaction capacity of as much as 155 billion m³/y. Excelerate Energy has already put its export plans at Lavaca Bay on hold.

Aussie economics

Lower LNG prices will also negatively impact new LNG developments set to come online between 2015 and 2016. More than 85 billion m³ of new LNG export capacity is due to start up in Australia alone over the next two years.

Many of these projects have been high cost and have significantly run over budget. While the design for most of these developments is in excess of 30 years, low revenues at the start of the project lifecycle will reflect badly on the companies that have invested billions of dollars. The vast Gorgon project will reportedly cost as much as US$54 billion to complete and is thought to have approximately 30% of its capacity unsold.

While the crude price is expected to stabilise over the coming two years, steadying oil linked LNG prices, the increasing availability LNG on the spot market from new projects should keep prices low. While for a long time BMI have said that the competitiveness of Australian LNG projects is weak, the pricing dynamics evolving from a weaker oil outlook will postpone new LNG developments in Australia for some time.

Oversupply expected

Given the 68 billion of pipeline contracts China has agreed with Russia over 2014, BMI believes Asian demand for LNG will be less than many companies anticipated.  Similarly, Japan is expected to begin restarts of its nuclear power facilities in 2015, which will remove any potential LNG demand growth from the world’s biggest importer.

India could see strong demand growth, though over 2015 and 2016 will not be able to substantially increase regasification capacity. Europe could surprise to the upside if economic growth improves, however LNG prices in the region are lower than Asia making it less attractive for producers. Alongside the fall in crude oil, LNG prices are therefore also expected to remain depressed for a number of years.

Adapted from a report by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/28012015/lng-project-competitiveness-128/