Global LNG

Published at 15:09 9 Mar 2018 by

The JKM LNG market drifted upwards this week as forecasts of another late winter cold spell pushed the NBP and TTF higher. The market also received some clarity that the force majeure for PNG LNG exports will last two months, instead of a couple of weeks, taking around 1.2 Mt of supply out of the balances for the next two months. Some operational issues have also led to a supply outage at Algeria’s Skikda plant. The week also saw more bad news for Western Canadian LNG supply projects, with Woodside cancelling the 20 Mtpa Grassy Point project. For the coming weeks, mild weather in Northeast Asia should start to feed through to the buy side once the lost cargoes from PNG are replaced, leading to a narrowing of over 1 $/mmbtu premium of the JKM curve to the TTF. 

The JKM LNG curve moved up over the week due to volatility at the TTF, where prices rose due to forecasts of cold weather in Europe for the latter half of March. By close Thursday, the TTF Apr-18 contract moved to almost 6.8 $/mmbtu (up 4.4% w/w), while May-18 rose to 6.3 $/mmbtu (up 5.6% w/w). The JKM responded by adding 10 cents w/w to Apr-18 and 35 cents w/w to May-18 contracts—although that keeps a hefty premium to the TTF of around 1.6 $/mmbtu for both the Apr-18 and the May-18. For the coming summer, the JKM is pricing above 7 $/mmbtu for all contracts, which still seems high given the expected supply-side additions.

JKM up again as PNG LNG outage set to last longer

Part of that premium was likely driven by the ongoing outage at PNG LNG, stemming from last week’s 7.5 magnitude earthquake in Papua New Guinea, which led ExxonMobil to declare force majeure on loadings from the facility. A second 6.7 magnitude aftershock on Wednesday (7 March) in the same region suggests that the duration of the force majeure could be longer than the couple of weeks that we expected last week. The epicentre of the main earthquake and the aftershocks were near the Hides gas conditioning plant and Hides gas production pads, which are the facilities that provide the feedstock for the LNG plants on the coast. Recent reports suggest that assessed damage to the production field and associated infrastructure will require up to eight weeks for the repair work before the production of gas can be restarted. The outage will take 0.6 Mt of supply out of the global LNG market in each of March and April. Japan and China are the main buyers for PNG LNG gas, so the response of the JKM curve to these events suggests that some added cargoes are being sought for delivery in the next two months. In turn, this is likely to curtail the volume of LNG available for Europe.

Of further concern for the project is that senior politicians in Papua New Guinea have been asking for a scientific inquiry to assess if the gas production has been a cause of the recent earthquakes. If a study has to happen before production of LNG is allowed to restart, the force majeure could be in place for longer than two months, but that has not yet been imposed as a condition.

While less significant, Algeria’s Skikda LNG export plant, which had been seeing some production problems, has now taken one of its four trains offline for 40-50 days from early March—a seasonally early start to maintenance, which will cut Algerian supply by around 0.4 Mt.

Canadian supply projects withering

The company results season has not seen many further announced delays to the trains scheduled to come online in 2018. The main one is the first 4.4 Mtpa Freeport train has now been confirmed to have its scheduled start-up moved from Q4 18 to Q1 19.  This removes 0.2 Mt from our 2018 forecasts.

While there was lots of positive talk about new supply projects at an earlier stage in the process, the highly supplied global market is still a headwind to some major projects moving ahead. One of the places that looks the hardest for projects to proceed is Western Canada. This week, Woodside cancelled its up to 20 Mtpa Grassy Point LNG project, choosing instead to focus its efforts on the 10 Mtpa Kitimat LNG project. Kitimat LNG is a 50/50 partnership between Woodside and Chevron. At the same time, Chevron indicated it was looking to sell some of its 50% stake in the project. Grassy Point LNG joins a growing list of projects that have been cancelled in Western Canada, with PETRONAS’s 12 Mtpa Pacific Northwest project the most high-profile of those cancelled last year. All eyes are now trained on whether the Shell-led consortium moves ahead with its 12 Mtpa LNG Canada project, where an FID was being targeted for 2018. If that fails to go ahead, it is hard to see any of the large-scale projects in western Canada actually getting traction to proceed before the end of the decade.

This has big implications for AECO prices in Canada and how to monetise the abundant gas resources found in the Montney and Duvernay fields. A failure to get this gas to market will consign Albertan hub prices to continue to trade at big discounts to US gas prices.  

Next pricing moves likely to be downwards

For the coming weeks, Northeast Asian weather is looking milder than normal across the three big northeast Asian buyers. The reduction in heating demand will slow buying in South Korea and Japan, while China will continue to see y/y growth in gas demand as the rationing on gas consumption in industry and transport are now being eased. We still expect to see JKM prices start to narrow their premium to the TTF across the coming summer. While weather forecasts have been very volatile in Northwest Europe, gas hubs in the region have priced in another cold spell in the coming two weeks. If forecasts change again, then we would expect to see some downside on the TTF prompt and summer curve.

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