Weakness in Europe’s gas markets dragged the JKM down as the NE Asian market had little need for additional US cargoes over Q2 19—a dynamic we expect will continue and put more downward pressure on global benchmark prices. The TTF Jun-19 is already at 4.75 $/mmbtu and only needs to fall by another 1.00 $/mmbtu to put the arb window between Henry Hub and Europe on the verge of closing.
As we move through the Q2 19 buying period, the global market still seems bearish, with the JKM curve in contango for all monthly delivery contracts to January. The JKM contango is reflecting the contango in the TTF curve but does have implications for the market. The JKM contango between Sep-19 and Dec-19 is 1.90 $/mmbtu, which should encourage some use of floating storage to arb that difference. The use of floating storage suggests another autumnal spike in freight rates, and while they might not hit the 200,000 $/d seen last year, they could certainly hit 100,000 $/d. Such a spike in freight would then be reflected in a widening of the JKM-TTF spreads. That widening is already being seen in future pricing with the Dec-19 JKM-TTF spreads at 1.16 $/mmbtu, and it seems likely that will widen out as we get closer to delivery and future freight rates start moving upwards.
Still, in the shorter term there seem to be few bullish drivers out there for the Jun-19 TTF contract. EU storage looks like its eye-watering y/y surplus of over 24 bcm (end of March) could get even bigger before it starts to decrease. Supply in the global LNG market has not shown any signs of w/w increases since December 2018 but has also not shown any inclination to fall. While we are still early in the maintenance season, with few reports of trains offline (maybe two at Ras Laffan and some at Sabine Pass), the market will be seeing some loss in volumes due to maintenance, to be somewhat offset by increases in volumes from new trains.
Expectations that the new US terminals will not add much supply this summer offer only some respite. What supply there will be from the 4.4 Mtpa Cameron LNG T1, 4.5 Mtpa Corpus Christi T2 and the 4.4 Mtpa Freeport LNG is likely to be coming in now over Q3 19. The 3.6 Mtpa Prelude is still expected sooner, but it is starting up very slowly, while the 4.2 Mtpa Ichthys train 2 is still a question mark. Even Cyclone Veronica, which led to a suspension of marine traffic around western Australia for a few days, has done little to slow weekly LNG flows. Some modest demand is being seen, with Indian imports starting to recover from a very low December–February period and buyers more active in the spot markets.
Still, the big headwind is Europe. With NE Asia at the prompt in no hurry to encourage spot US cargoes, further expected weakness in the TTF should drag the JKM down with it over the coming weeks. With the TTF-Henry Hub arb now at about 0.9 $/mmbtu and the Henry Hub summer strip around 2.8 $/mmbtu, that arb window would be largely closed if the TTF dropped another dollar.
While US LNG export projects have tended to hog the limelight, Russia has started to grab more of the LNG market. Russia has been a long-term exporter of LNG, although before last year it had just one terminal—the 9.6 Mtpa Sakhalin 2 project operated by Gazprom with Shell, Mitsui and Mitsubishi as partners. December 2017 saw the commissioning of the first 5.5 Mtpa train at Yamal by Novatek, followed by the next two trains coming online through 2018. By early 2019, Russian LNG exports were up at 2.5 Mtpm, a similar level to the US.
Unlike the US, Russia does not have a further slate of trains that are about to start up. Under construction are a mere few mini-trains—the 0.7 Mtpa Vysotsk and 0.9 Mtpa Yamal T4 (both Novatek), and the 1.5 Mtpa Portovaya (Gazprom) facility—which are all expected to be online in the coming 12 months. While those terminals are all small-scale, there is a growing list of advanced projects that are all nearing FIDs to go ahead.
In a development that had little pre-warning, Gazprom last Friday announced that it taken a ‘final decision’ on developing the 13 Mtpa LNG project at the Baltic sea port of Ust-Luga, the town that is also the starting point for the Nord Stream pipelines. Gazprom announced that it and RusGazDobycha (owned by Russia’s National Chemical Company) made a decision on the final project configuration and said the partners have now moved to the implementation stage. In addition to 13 Mtpa of liquefaction capacity, the project includes plans for capacity to process 45 bcm of natural gas, 4 Mtpa of ethane and over 2.2 Mtpa of LPG. The complex will be processing ethane-rich gas produced by Gazprom from the Achimov and Valanginian deposits of the Nadym-Pur-Taz region. Gazprom expects first LNG exports of the complex to come into operation in H2 23 and a second train in late 2024, although the timing of the first train looks optimistic.
The implementation phase does include full front-end engineering and design (FEED), financing and contracting of the projects, so it is difficult to consider this an FID given how early it is in the project process. In October 2018, Gazprom announced it was talking to Shell about pre-FEED activity on the project known as Baltic LNG, while in December 2018, Gazprom announced an MOU with Itochu for cooperation on the same project. Even at that time, both were talking about a 10 Mtpa export facility. While the location of the LNG projects is the same, the wider scope of the new project and the absence of any foreign partners does raise questions about whether this project is a replacement for, or in addition to, the Baltic LNG project discussed with Itochu and Shell.
The announcement also came as a surprise as it appeared that Gazprom’s proposed 5.4 Mtpa expansion to the existing Sakhalin 2 LNG T3 project was the front runner for an FID. The Sakhalin project had finished FEED and had already announced that it was going to take an FID on the project in late 2018 or early 2019. With Gazprom yet to make an announcement on that project, just how many eggs it wants to put in the LNG basket should become clear in the coming months.
Apart from Gazprom’s projects, Novatek is pursuing a new three-train 19.8 Mtpa Arctic LNG project in the Yamal peninsula and has signed Total as a 10% equity partner, which was recently confirmed despite some issues with a 25% threshold. Novatek has said it wants to have partners hold 40% of the equity, with Saudi Aramco and CNPC both having expressed interest in taking some of the remaining 30% share. About 25% of the project equipment has been contracted, and an FID is expected in H2 19 with commissioning of the first train in late 2023.
Last, Rosneft and ExxonMobil have their 6.2 Mtpa Far East LNG project that will also be located on Sakhalin. The project has been reported to be in talks with Japan’s Sodeco and India’s ONGC for equity. In Q4 18, a decision on the FID was scheduled for 2019.
While all of that adds up to some 59.5 Mtpa of potential new capacity to be signed off in 2019, we could be seeing another wave of Russian LNG supply hitting the market around 2024.
|Russia recently completed, under-construction and announced LNG terminals|
|Source: Company websites, Argus Media Group, Bloomberg, Refinitiv, Energy Aspects|