Spoiler alert

Published at 16:15 28 Apr 2017 by

Globally, LNG prices were pretty stable in April, trading around 5.25 $/mmbtu for most of the month, down by 9% m/m. By the end of the month, prices had moved back up to 5.55 $/mmbtu thanks to some unplanned outages at Australian trains and some summer buying.

With three Gorgon Trains and three Sabine Pass trains all online and producing, the market already has some healthy y/y supply growth to absorb. However, the sobering thought for the market is that we are only around half way through this current round of capacity additions. Of the 160 Mt being added in the period from 2014 to 2020, 76 Mt has come online so far. While the market has absorbed all of these volumes, it has resulted in spot prices below 6 $/mmbtu.

Against the backdrop of a lurch into a period of acute competition for market share, one of the stranger outcomes has been suppliers coming up with the novel idea of offering fixed-price term contracts. The most interesting of these was Tellurian’s Driftwood LNG project, which offered a five-year supply contract at a fixed 8 $/mmbtu for delivery to Japan. Given perhaps 1.5 $/mmbtu of variable supply costs to Japan, a $2.5 liquefaction capacity charge and a Henry Hub price under 4 $/mmbtu, this just about makes economic sense. But these are pretty fine margins and the offer by Tellurian, led by ex-Cheniere chief Souki, is a spoiler for other liquefaction projects.

Another strange outcome is the obsession of the supply side with adding yet more supply. Qatar lifted its moratorium on the development, put in place in 2005, of its large North Field. At the same time, Iranian production from its South Pars field (which shares a reservoir with the North Field) has got to the point where it could exceed Qatari output as early as this year, although Iran does not have any liquefaction projects that are operational or set to start in the next few years. The development in the southern section of the North Field will have a capacity of 2 bcf/d (21 bcm/y) and raise the field’s output by about 10% when it starts production in 5-7 years.

The relaxing of the moratorium comes at a time when some progress has been made by Iran on its export project for South Pars gas. Total has provisionally agreed, pending any change on US sanctions, to get significantly involved in its development. While the two events might be a coincidence, we highlight that lifting the moratorium cost the Qatari’s nothing. It is not taking an FID on another liquefaction train, which would cost a similar amount as, say, taking an FID on trains in the US. However, given the scale of the development, there is a question of what Qatargas will do with that gas if it is not exporting it. Regardless, the potential for Qatargas to build another train is another potential spoiler for other new projects that are in development.

The Qataris also saw the US DoE finally give Qatar Petroleum and ExxonMobil’s Golden Pass project an approval to export to non-Free Trade Agreement countries. Suddenly, in a highly competitive environment not exactly crying out for FIDs, Qatar has a number of investment projects it will need to decide on favouring or benching.

For Q2 17, Northeast Asian prices will average around 5.1 $/mmbtu, up from our previous forecasts of 4.6 $/mmbtu, largely due to the impact of April’s unexpected cold weather on Europe’s summer balances.  Our forecast are lower than prevailing prices, although the restart of Gorgon Train 2 should help ease Asian spot prices. With last summer having been particularly hot in Asia, particularly in South Korea and Japan, Asia could well struggle to replicate last year’s summer demand levels, paving the way for a more relaxed spot market. 

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