The week was dominated by the first FID for a long while on a large-scale greenfield LNG export project, with Shell green-lighting the 14 Mtpa LNG Canada project. While some 15% of the offtake will be in the hands of a Chinese buyer, the rest falls into underlying portfolios. While the gas could be marketed anywhere, the most likely destination is China. Many other LNG projects at an advanced stage are also earmarking supply for China, with the global LNG market putting plenty of eggs in one basket. Against that background, the front of the JKM curve did soften a little this week but mostly due to even bigger softening at the front of the TTF curve. Winter JKM-TTF spreads are still comfortably pulling all available LNG to the Asian market, while greater backwardation in the JKM curve than TTF means summer 2019 is promising more LNG for Europe.
Return of the big project FID
Last week the talk was all about the return of the long-term contract, while this week was all about the return of the big project FID. While Shell’s FID on the 14 Mtpa LNG Canada project had been on the cards for a while, it was still big news when the decision came as it is the first large-scale greenfield LNG export project we have seen since the raft of Australian project FIDs back in the post-Fukushima period of 2012-13. We have run through the raft of reasons behind why LNG Canada was able to take an FID (see E-mail alert: 14 Mtpa LNG Canada project takes FID, heralding start of a new LNG supply wave, 1 October 2018). We think that this will be the first of a batch of projects going to FID in the coming two years, which will herald another supply wave of new projects coming online around 2023-2025. While the market has tightened far faster than anyone expected a few years ago, most of that tightening is due to the impact high Chinese demand is having on the LNG market. In terms of LNG Canada, some 15% of the direct offtake of supply will go to a Chinese buyer (CNPC), while 65% will be for LNG suppliers’ portfolios (Shell, Petronas) and 20% will go to Asian LNG buyers/traders (Mitsubishi, KOGAS). In essence, this suggests that at least 85% of LNG Canada supply could reasonably be expected to be sold into the Chinese market by the project’s offtakers. What is interesting is that little of this gas seems to be pre-marketed directly to Chinese buyers, although the project participants could use that gas to swap in for other less proximate LNG they currently sell into the Chinese market. However, this does suggest that there is some merchant risk being taken by these project participants that is largely banking on the continuation of robust Chinese demand growth. While we would concur that Chinese demand growth will continue at high rates through the coming three years, this growth will eventually begin to slow.
Market softening – not fundamentally
Some softness in JKM pricing at the front of the curve this last week does not really herald a significant shift in underlying perceptions of the global gas market. We think Asian LNG buying as a whole this winter has been completed, particularly by Chinese buyers that have been concerned for a long while about getting through what looks to be another very tight winter market. The first four JKM monthly contracts (Nov-18 to Feb-19), which dropped by 1-2% w/w, fell less than the corresponding TTF contracts. The TTF contracts were bid down from very high prices because of shifting weather forecasts that went back to calling for a warmer-than-normal period for the next two weeks in NW Europe. With that promising a longer period of storage builds, prices came down and allowed the JKM to soften as well. The smaller percentage falls at the JKM meant that the JKM-TTF spread widened moderately and stayed above the low 3 $/mmbtu level which keeps European reloads economically viable. The narrower spreads for summer 2019 delivery, when backwardation on the JKM curve is steeper than on the TTF, does suggest more LNG will come to Europe then. Part of the flatter backwardation at the TTF is due to strong European carbon market prices keeping the summer gas curve elevated. If carbon prices stay where they are now, then just reverting back to last year’s relative gas price would keep TTF prices above 8 $/mmbtu. With the carbon market still looking bullish, those summer gas prices could see even further support and could begin to attract more LNG. The spreads for summer 2019 delivery are now around 1.4 $/mmbtu, in the region in which some market participants will see higher netbacks by sending US cargoes to Europe than Asia. Although there will be more global LNG supply next summer, with an expected 2.0 Mt per month of new US and Russian LNG terminal supply to be online, there certainly could be periods where more supply washes into Europe.
For winter 2018/19, our balances point to y/y increments in supply to Europe only happening in the second half of Q1 19. The level of LNG supply available to Europe will depend on the weather in Asia. In the event of a milder-than-normal winter, which is the current consensus on seasonal weather forecasts for NE Asia, we expect China not to sell cargoes back into the market given the scale of demand it may still have to get through the peak winter months. Japan and Korea could well be sellers of incremental cargoes if the winter is mild, although we expect neither to really look to unload cargoes in Q4 18, instead preferring to build stocks early in the winter.
|Fig 1: LNG project supply from recent FID, Mt||Fig 2: Forward JKM spreads, $/mmbtu|
|Source: Company websites, Energy Aspects||Source: Reuters, CME, Energy Aspects|