The bearishness in the global LNG market continued, with a very loose European market helping to pull a similarly weak Asian market further down.The JKM and TTF are approaching multi-year low prices. Demand is appearing more focussed on South Asia. The ongoing US-China trade war has yet to provide any support, as the well-supplied market is having little problem swapping US LNG cargoes away from China. The impact of the trade dispute is being felt more in delays to getting long-term supply deals done between the two countries, with reported deals involving US projects from Cheniere, Delfin LNG and Pembina’s Jordan Cove all apparently ready to be signed on resolution of the trade dispute.
The global gas bears are still out in full force, as the JKM followed further softness in the TTF. The Apr-19 and May-19 JKM contracts closed last week just under 6.0 $/mmbtu (average -3.1% w/w). The TTF was down as European coal prices dropped and the gas storage surplus increased further y/y. The TTF-JKM spread for Q2 19-delivery contracts stayed below 50 cents/mmbtu, so well below what is needed to shift US Gulf Coast LNG to Asia. Given the high level of LNG stocks in NE Asia, any basis rallies are unlikely in the coming weeks. The JKM-TTF spread at which US cargoes prefer Asia over Europe on a netback basis has stayed around 70 cents/mmbtu for the last two weeks. With Q3 19 JKM contracts remaining better bid than Q2 19 contracts, the average basis across those July-19 to Sep-19 has stayed over 80 cents/mmbtu, pointing to that peak summer market being a bit tighter than the Q2 shoulder quarter.
The China-US trade dispute, while undoubtedly important for the LNG market, has not provided any real price support. Chinese demand for spot LNG has been muted after the country’s buying spree in Q3 18 in anticipation of a much colder winter than has actually transpired. As we expected, the market also worked very efficiently at geographically swapping cargoes around, with only 0.2 Mt of US LNG having gone to China in Q1 19. Also, we have seen a number of US project developers largely agree terms for long-term supply with Chinese buyers, with turning those into binding agreements being contingent on a resolution of the trade dispute. How close we are to resolution is debatable, with some reports last week suggesting that US President Trump felt a trade deal was imminent, while others said that the Chinese were wary of sending President Xi to a possible summit with Trump in Florida if there is a risk the US president would denounce a deal that had not been fully agreed.
There is even talk that the summit, at the end of March, has been postponed, with no attempt yet to find a later suitable date. We could get to the end of March and tariffs on US LNG imports to China could be ratcheted up to 25%. The impact on the market has been minimal with the market proving adept at reallocating US cargoes away from China with tariffs already at 10%. Higher tariffs in general could drag more heavily on the Chinese economy, which would likely depress industrial production and slow the underlying growth of gas demand.
US projects: Another busy week
On the supply side, US LNG had another busy week, both in terms of those projects starting-up and those looking to progress to FID. Staring with the new trains coming online, Cheniere declared ‘substantial completion’ on its 4.5 Mtpa Sabine Pass T5 project. In its earnings call, Cheniere did say it had exported four cargoes from T5 in Q4 18, so this latest announcement was basically stating that the commissioning process was complete and they could start the move to full commercial operation. We expect this to mean consistent LNG production and exports from that train, in line with the assumptions in our balances. Cheniere also received FERC permission to introduce feedgas into the 4.5 Mtpa Corpus Christi T2 facility, with plans for an in-service date in H2 19 but first LNG exports possibly by June. Reports also surfaced that Sinopec is intending to sign a 20-year, 2 Mtpa sales and purchase agreement with Cheniere, expected to start in 2023, once the current trade dispute between the US and China is resolved. We expect that deal would facilitate an FID on the proposed 4.5 Mtpa Sabine Pass T6 project.
In contrast, Sempra’s Q4 18 earnings results did suggest more delays on the 4.4 Mtpa Cameron LNG project, with project developer Sempra outlining the project had seen a $168 million increase in project costs due to poor labour productivity and a rise in subcontractor, commissioning and construction management costs. The project also restated that some unanticipated work needed to be carried out over Q4 18 and Q1 19, and so it reallocated resources from T2 and T3 to keep the completion of T1 ‘more or less’ on schedule, with first gas exports expected in late Q1 19 or early Q2 19. We still see that as somewhat optimistic as feedgas has yet to be consistently taken by the project. If first gas exports from T1 take place in May, the earliest we expect to see first exports would be November for T2 and May 2020 for T3, given the reallocation of resources away those latter two terminals to T1. Regardless, this timeline would still represent a delay versus previous guidance that all three trains would be exporting in 2019.
Last week also saw some developments on a couple of projects that are part of a long list of US LNG export projects that could be described as ‘less commercially advanced’. The 13 Mtpa Delfin FLNG project announced a Memorandum of Understanding (MoU) to supply 3 Mtpa of LNG to China Gas Holdings, which will move to a binding agreement once the trade dispute ends. As that would be the first binding agreement for the project, the targeted FID by end-2019 seems very optimistic. The 7.5 Mtpa Jordan Cove project in Oregon has MoUs for 11 Mtpa of LNG to be supplied to buyers, with the trick now being to convert just over half of those to binding contracts. While the buyers were not identified, the company hinted that some were in China, so there is an element hinging on a resolution of the trade dispute. Last, the 27 Mtpa Rio Grande LNG project developed by NextDecade announced it was offering a smorgasbord of pricing options to potential long-term buyers, including prices linked to Henry Hub, the TTF, JKM, other US hubs and Brent. While this is innovative in the space, it does reflect just how many projects there are and how competitive it is to sign up long-term buyers.
One project that had apparently already taken an FID, Venture Global LNG’s 10 Mtpa Calcasieu Pass, announced it had finally received US DoE approval to export LNG to non-free trade agreement countries. The only thing that was really remarkable about that was the fact that the FID preceded the non-FTA export approval.
|Fig 1: Selected US completed, under construction and announced liquefaction terminals|
Notes: Start dates as assessed by Energy Aspects. Key: AP – approved; PR – proposed; DOE – under DOE review; PF – Pre-filing