The global gas market saw a degree of stabilisation last week after falling for most of the last three months. The TTF stabilised as a rise in European coal prices (which followed the oil market up) offset fundamental weakness in other components of the European gas market. While flat prices eased, the JKM-TTF spread also stabilised, but did so at a level (around 90 cent/mmbtu) that is still high enough to get marginal US cargoes going to the East. We think few of the cargoes from under-construction US terminals are yet to be hedged at either the JKM or TTF, but once these facilities get closer to operation, selling should commence. While the 4.0 Mt Cameron LNG T1 was to be the first of these trains, with an online date in Q1 19, the recent investor calls suggested a delay to Q2 19. Given where that project is with its FERC permitting, we think first export is more likely later rather than earlier in that quarter.
The TTF stayed largely unchanged w/w on Friday (15 February) at around 6 $/mmbtu. With little movement in the curves, the JKM-TTF spread continued to price for summer 2019-delivery months at just above 90 cent/mmbtu. Given freight rates have dropped again w/w by an average of 4,000 $/d to 51,000 $/d, the netbacks for US LNG are still in favour of cargoes heading to Asia as the breakeven JKM-TTF spread is now around 0.65 $/mmbtu. This still holds the likelihood of a fairly good Asian pull on US cargoes in summer 2019, although we doubt much volume from new US cargoes expected online this year will be hedged into either the JKM or the TTF yet. Friday’s closing JKM prices recovered from mid-week lows, with Q2-19 adding back an average of 23 cents/mmbtu on the back of a possible supply outage and a recovery in oil prices.Brent added 7.7% w/w at Friday close, gaining steadily over most days last week, with a 4.0 $ per barrel gain in Brent leading to a 54 cent/mmbtu addition on a 13.5% oil-indexed slope.
On the supply side, it was reported that Malaysia LNG’s (MLNG) 30 Mtpa Bintulu complex had alerted a number of clients that coming cargoes were to be delayed by about one week. MLNG put the delays down to pipeline issues for feedgas, although details appear scant. Given the predominance of NE Asian buyers served by MLNG, a week-long delay is unlikely to push anyone into the spot market for cover given the seasonally high volumes of LNG stocks. Still, Bintulu has recent experience with delays as last year’s pipeline outage decreased MLNG exports by around 10% over the first three quarters of 2018. Any indication of more extensive delays could certainly lead to expectations of more pronounced supply disruption this year.
Argentina: problems at Vaca Muerta?
Demand from Argentina, once a fairly dependable buyer of LNG, has ebbed as production from the Vaca Muerta shale play has accelerated. Argentina’s imports have fallen from 4.2 Mt in 2015 to 2.7 Mt in 2018, and we anticipate further reductions as the country expects to start modest LNG exports this year. The LNG exports, facilitated by the arrival of a 0.5 Mtpa LNG liquefaction barge (the Tango FLNG) earlier this month, should largely take place in the southern hemisphere summer (October-March) as Argentina still has some winter need for gas imports.
How quickly that winter need for LNG is eroded depends on whether growth in domestic production from the Vaca Muerta shale play continues. 2018 was a very good year for Vaca Muerta gas production, with output rising by 10% y/y to nearly 1.0 bcf/d by the end of December. The production growth has been driven in part by a healthy subsidy programme that saw the government promise to pay producers a guaranteed 7.5 $/mmbtu price for output, although that subsidy level had been scheduled to drop to a still-healthy 6 $/mmbtu by 2020.
As output has grown, however, the government has increasingly struggled to pay for all of the gas being produced. In late December 2018, the energy ministry was merged with the finance ministry as the government instituted austerity measures dictated by the conditions attached to a $50 billion International Monetary Fund (IMF) loan. The budgetary pressures caused by the subsidies has now led to a cap on both the existing level of subsidies and subsidies for new production.
The decision to limit subsidies is already having an impact. One of the key Vaca Muerta producers, Tecpetrol, which has been involved in a $2.3 billion drilling programme in the Fortin de Piedra area, announced plans this month to halt work at three of its four rigs due to the changes. YPF also warned in late January that it will face losses due to changes to the subsidy scheme and was considering reducing its planned $4.5 billion investments in the region.
While local producers are pulling back, foreign companies still seem interested. Petronas announced a $2.3 billion joint venture with YPF in December 2018, while BP, ExxonMobil, Chevron, Equinor, Total, and Qatar Petroleum are all current Vaca Muerta investors. The change to subsidy arrangements should slow medium-term progress in Vaca Muerta gas production, but the recent acceleration in production will mean that 2019 will still see healthy y/y production increments, allowing LNG demand to drop further. We expect the change in subsidies will be felt more acutely in 2020, with further y/y growth much harder to come by and Capex budgets of foreign companies potentially reallocated away from Argentina. As such, LNG exports will be needed for longer, with y/y declines in 2020 now looking marginal at best.
For 2019, Ieasa (formerly Enarsa) issued a tender last week for 12 cargoes to be supplied between late May to early August, which is around 0.7 Mt in total. We do expect one to two more tenders this winter, but we still expect to see 2019 Argentine buying of LNG to soften by around 1 Mt y/y.
In a move that looks overly optimistic, the Argentine government amended its gas pipeline concession regulations in an effort to promote investment. Under the new regulations, pipeline concessions will be able to guarantee firm service capacity to interested shippers for 35 years, with free negotiation between the parties to set allocation terms, volumes and prices. With midstream and downstream constraints now looking less important and foreign investors potentially scared off by the latest policy shift, such private investment is likely to stay low.
|Fig 1: Argentinean LNG imports, Mt, y/y||Fig 2: Cif-ARA price, M+1, $/t|
|Source: AEMO, Energy Aspects||Source: Refinitiv, Energy Aspects|
Yemen LNG – still unlikely for a while
A minister in Yemen’s Saudi-backed government predicted the country would restart LNG exports this year, with an ambitious goal of exporting over 3 Mt in 2019. Yemen’s 6.7 Mtpa Balhaf LNG was shut in 2015 because of the conflict between Houthi rebels and a Saudi-led military coalition. While a partial ceasefire has been in place for several months, efforts to resolve the conflict have made little headway, meaning the risks on the ground remain high. The lead shareholder of Yemen LNG, Total, made no mention of restarting the plant in its latest earnings call earlier this month, which hardly suggests a restart is imminent. Until there is a durable diplomatic breakthrough, we believe the plant will remain offline, so we are not adjusting our forecasts for now.