A rapid upward repricing at the TTF pushed the JKM upwards, keeping the front-end JKM-TTF spreads largely unchanged. The TTF was buoyed by carbon, weather, and easing pipeline supply, and a heavily short market was caught out. While the TTF may well linger at these levels a bit longer, we do expect the wider fundamentals to begin to weigh, dragging global gas back down. We are getting into the maintenance period for LNG supply trains, and a half dozen or so trains are already out, with three of those at Sabine Pass. While global supply will begin to slow on the maintenance period, demand is also dropping as northern hemisphere heating demand draws to a close, so we expect the markets to stay comfortable.
Price moves this week were all about a sudden and unexpected upward pricing event in the European markets, with the TTF M+2 closing Monday up 18% w/w at 16.1 €/MWh. The upward repricing started on Thursday, when prices in Europe’s emission trading scheme (EU ETS) shot upwards and managed to close Monday up 11% w/w. That movement up was largely a relief rally on Brexit, as political developments in the block suggested that a potentially long extension to the UK’s exit date was the most likely outcome of the current political impasse. The EU gas market also benefited from some weather forecast revisions pointing to a colder April and some slowdown in pipeline flows from Norway and Russia, although the last two were expected and not unusual for the time of year. Last, the TTF had been structurally bearish, and as prices started heading the other way, shorts had to come out of the market. That short-covering just added upward momentum to the price levels.
With the TTF leading the way, the JKM was in a reactive mood, and JKM-TTF spreads stayed largely the same for the prompt contracts, with the JKM premium for Jun-19 at 28 cents and Jul-19 at 51 cents. The Jul-19 contract is sitting right at the point where a US Gulf cargo should be indifferent to swinging either to Asia or to Europe. As both of those point to more LNG for Europe, the upward repricing does seem optimistic given the loose balances still expected for the TTF. While we do think there could be a number of trading sessions where these higher prices persist, we still think the EU markets will need to get more gas into power to balance. This means lower prices could come back into the market once any April cold finishes or if carbon reprices downwards, suggesting it is just a matter of time before the JKM will be pushed back down. We think there could still be a bit of technical support for prices in both EU gas and carbon, but the TTF fundamentals suggest some further softening is still needed. This repricing has made it far less likely the arb window with US LNG cargoes will close this summer.
|Fig 1: EUA price, €/t||Fig 2: EUA daily trading range, €/t|
|Source: Refinitiv, Energy Aspects||Source: Refinitiv, Energy Aspects|
While the last few days have all been about the surprise TTF repricing, the start of the shoulder season also means the start of the annual maintenance season on LNG infrastructure. Kicking off was Cheniere’s five-train Sabine Pass export facility, which has seen feedgas drop into the facility since maintenance started on 22 March. In recent days, the feedgas numbers have fallen even further, suggesting that now three of the five trains are off on maintenance. One of the two trains at Gazprom’s 9.6 Mtpa Sakhalin-2 project was also taken offline following an unscheduled outage on a technical failure. BP has shut down operation at one train of the 7.6 Mtpa Tangguh LNG plant in Indonesia for a 23-day maintenance, with the plant expected back on mid-April. With Q2 usually the heaviest time for LNG train maintenance, expect the list of trains being taken off for two- to three-week maintenance periods to grow.
In a week which saw plenty of details about long-term agreements announced (few of them binding), one thing that did stand out was projects talking up ‘innovative’ indexation clauses. An heads of agreement (HOA) was signed between Tokyo Gas and Shell for the former to buy 0.5 Mtpa of LNG for 10 years from April 2020, to be partially indexed to coal, with gas indexation and oil indexation also featuring in the index. NextDecade also announced it had signed a 20-year, 2 Mtpa long-term contract for LNG produced at its Rio Grande LNG export project in Brownsville, Texas, with Shell that was to be indexed to Brent oil prices.
In both of these cases, it really seems a question of why. The importance of the innovation of getting gas hub indexation in long-term contracts—be it Henry Hub, TTF or JKM—was that it provided contract participants with direct exposure to prices reflective of gas supply and demand fundamentals.
Now, as the JKM becomes more liquid, the presence of an Asian gas hub reflecting Asian LNG supply and demand fundamentals means that any other type of indexation will open up the participants to basis risk—the risk that, say, Brent or Newcastle and the JKM/Henry Hub/TTF go in different directions, which is happening this year. When this happens, one party will be facing a price that is ‘out of the money’ compared to all other gas users with a direct gas index.
Maybe we can understand a utility wanting to keep its gas cheap enough to burn against coal. However, in the event hub gas is pricing expensive in comparison to that index contract price, would the buyer not simply want to sell their cheap gas into the gas market and profit from that basis difference? With the most likely answer to be ‘yes,’ then it would still not dispatch its gas-fired power, suggesting that the only result of the index is to create winners and losers among the contract participants. Such ‘innovative’ indexation seems to miss the point of the growing commoditisation of global gas.
Among the other announced supply projects, Total announced it intends to commit to Tellurian’s Driftwood LNG project, with HOAs covering 2.5 Mtpa of LNG offtake and equity investments. Woodside Petroleum announced an HOA with China's ENN Group for 1 Mtpa from 2025. Woodside indicated the contract would support its proposed expansion of the Pluto LNG facility and the associated Scarborough offshore gas resource. PNG LNG announced a binding four-year 0.45 Mtpa LNG SPA with Unipec Singapore for the supply of LNG commencing in April 2019. The supply will come from the project’s existing trains. Total and Guanghui have signed a 10-year SPA for 0.7 Mtpa to be delivered to Guanghui's Qidong regasification terminal, with LNG sourced from Total's global portfolio. Ocean LNG, a joint venture between Qatar Petroleum (70%) and ExxonMobil (30%), will market all of the gas from the partners’ 15.6 Mtpa Golden Pass project. Novatek announced two HOAs with Vitol and Repsol, each for a 15-year, 1 Mtpa LNG supply from its proposed 19.8 Mtpa Arctic LNG 2 project. The LNG will be delivered on a FOB basis to Novatek's trans-shipment terminals in the Murmansk region and Kamchatka.
It has been a busy start to the year in terms of LNG agreements, and for project developers, turning those HOA into binding SPAs will be key if they are to reach an FID in 2019.