Over April and May, Northeast Asian LNG prices continued to be stable and traded in the 5–6 $/mmbtu range. Lingering winter cold helped keep Northeast Asian demand relatively buoyant, while supply outages here and there (in particular, Gorgon) helped mitigate downward price pressure.
Demand developments in May have ranged from the very bullish to the very bearish. The former emanated from China, as more details emerged about the latest push on urban gasification. This policy aims at switching coal-fired boilers and heating systems in at least 1.2 million households in 28 of the smoggiest cities in Northern China to run on gas or electricity by October 2017.
While those numbers reflect the scale of the pollution problem in Northeast China, the target may still sound hugely ambitious. However, this is China, and 2016 company results for four of the bigger distribution companies (ENN, CRG, Towngas, and Beijing Gas) show that some 5.5 million residential customers were connected in that 12-month period. As such, a concentrated 1.2 million switch in the north of the country seems more than achievable. The accompanying growth in gas sales volumes to residential customers was relatively small in comparison, with around 0.8 bcm of demand added y/y from those residential customers. So even if the latest ambitious target is actually met, it is unlikely to be a game changer for the region.
We still see China posting incremental LNG demand of 4–6 Mtpa, though where exactly the gas might come from is a developing story. Indeed, the market was thrown a curve ball this month as the recent political rapprochement between China and the US ended up delivering a trade agreement that included the promise of China buying US LNG.
Realising this promise will be challenging. China currently has no long-term capacity with US liquefaction projects, and its majors are all over-contracted in the short term and are thus more likely to be spot LNG sellers than buyers. To the extent that political pressure comes to bear on the majors to buy some US LNG in the here and now, this raises the spectre of some very non-economic trade, with Chinese buyers having to lift US spot cargoes for political reasons and selling some Australian or Qatari volumes to help make room in the domestic market.
As for May’s very bearish news, this came from supply-side developments in Egypt as BP announced that production had started early, and at an above expected rate, at its West Nile Delta (WND) project. This effectively serves notice that Egypt’s appetite for LNG imports had peaked and will mostly head downhill from here. With the WND gas adding to gas from the Nooros field (started end-2015 but has ramped up through 2016), and an expectation that Zohr gas will be adding further volumes at year-end, early indications are that Egyptian LNG imports could drop by more than 50% y/y in 2018. The market knew Egypt would cut back LNG imports eventually, but declines in H2 17 and a huge drop in 2018 would be faster than we expected.
Perhaps inevitably, delays to new projects have materialised, with first LNG at Ichthys pushed back all the way to start of Q2 18 while Shell’s 3.6 Mtpa Prelude LNG project was also subject to delay, with the project shifting from late 2017 to sometime in 2018 (we now assume a Q2 18 start-up for that project as well). These delays push back the period when the market needs to start locking in US LNG to summer 2018, meaning US exports should still be buoyant through the coming winter before coming under more sustained pressure in summer 2018.