The JKM-TTF spread has likely passed its narrowest point for summer 2019, with spot freight rates starting to pick up and putting pressure on spreads to widen across the summer contracts. The uptick in freight rates supports our long-held contention that Q2 19 was going to be the weakest period for the global markets, with Q3 19 contracts better bid on the need for summer cooling and then for stockbuilding ahead of winter 2019-20. NE Asia’s weak LNG takes in late winter have helped normalise previously high LNG stocks in the region. A return to more normal levels of demand will redirect some supply there. Cargoes had been going to Europe when demand in NE Asia was weak, so the redirection of flows east could reduce the number of cargoes available for Europe. Despite that, the start-up of some of the new trains—first exports from Cameron LNG look imminent—means that Europe will continue to receive incremental LNG over the rest of the summer months.
The TTF continued to soften last week as some very late season heating demand took place, but that demand shows signs of coming to an end. The EU market continues to be driven by high stock levels, which should still end May with a y/y overhang of some 23 bcm. The JKM-TTF spread for the remaining summer contracts (Jun-19 onwards) were all trading in a 0.9-1.1 $/mmbtu range, widening by 10 cents w/w on average. The widening of the spreads did occur amid freight rates increasing seasonally, with average spot freight rates going up by some 10,000 $/day to near 42,000 $/day over the last two weeks, according to Fearnleys. The JKM-TTF arb is still pointing the more marginal US cargoes to head to Asia (with the breakeven arb now at 65 cents/mmbtu), while still providing Yamal cargoes with a higher netback into the European market. We see Europe attracting 9 Mt of incremental supply in Q2 19, but that drops to 3 Mt in Q3 19, reflected in those wider JKM-TTF spreads. With much of that supply likely to arrive as Russian LNG, we do not expect to see a material narrowing of those spreads, although the seasonal tightening of the freight market, which we expect to see, could well put some further pressure on those spreads to widen.
The big recent news was the Chinese retaliation to US tariffs that involved increasing the tariff’s on US LNG imports from 10% to 25%. The impacts are more symbolic than actual, as in response to the 10% tariffs, hardly any US volumes have been going to China and now certainly none will go there with this new tariff levels. No Chinese buyers are signing up to long-term US LNG supplies, and that pattern now is just reinforced. As long as the tariffs persist, the biggest losers remain US LNG project developers.
FIDs approaching and a sale
The quarterly results period is always a good time to receive announcements on new projects and the last week has been no exception. Possibly the most intriguing developments were around the 12.8 Mtpa Mozambique LNG project. Anadarko announced early last week that it was ready to take an FID on the project and set the date for doing so as 18 June. Anadarko announced that commitments for financing were now in place, offtake agreements secured and all other issues under negotiation were successfully addressed. However, Anadarko then agreed the company’s sale to Occidental, a company mostly interested in Anadarko’s acreage in the prolific Permian and is a company short on any expertise in the LNG market. The lack of Occidental’s current interest in LNG then became apparent with an announcement that all of Anadarko’s African assets were to be sold to French major Total, including a stake in the Mozambique LNG project. Where this leaves the 18 June FID is anyone’s guess, but Total is more likely than Occidental to move quickly on an LNG project, given its growing footprint in the space and Total would likely have assessed the Mozambique LNG project to be one of the jewels in Anadarko’s African portfolio. It is likely that Anadarko's partners in Mozambique LNG—Mitsui (Japan), ENH (Mozambique), PTT (Thailand), ONGC, Bharat Petroleum and Oil India (all India)—will also want to move forward with the project sooner rather than later, as this project has been in development for years. We do think the FID is unlikely to be announced until the Occidental–Total deal is completed. But once the asset purchase is done, that FID could well be Total’s first new order of business.
Novatek suggested the FID on its 20 Mtpa Arctic LNG 2 project will occur sometime in early Q3 19, suggesting an announcement in July. Novatek announced that it had already agreed contracts for 75% of the project’s construction, although it has yet to find takers for only 10% of the share in the project, below the 30% it has indicated that it wants to divest.
Tellurian confirmed that it still plans to take an FID on at least some of the 27 Mtpa Driftwood LNG export project in Louisiana in 2019, a potential delay from the previous H1 19, which already was a move back from Q1 19. The company still maintains that it will start construction in 2019 and begin operations in 2023. The question remains can it get any more binding long-term buyers? So far no binding offtake agreement has been signed with offtakers. Tellurian has been reported to be in talks with Saudi Aramco and the hope must be that the company takes a chunk of supply, with Chinese buyers likely to be put off by the further deterioration in US-China relations recently (see E-mail alert: US-China trade war escalates though talks continue; imports of US LNG to fall, 10 May 2019).
A possibly more likely FID could be seen at the 4.5 Mtpa Sabine Pass train 6 project, with Cheniere announcing the FID should take place in the coming months. Cheniere also reaffirmed commercial in-service dates for the under-construction 4.5 Mtpa each Corpus Christi T2 (H2 19) and T3 (H2 21). This is no change in guidance and is not an indicator of first exports, as these tend to happen four to six months before the trains are deemed to be in service. Still, the company appeared to indicate it would introduce feedgas into the plant in the coming weeks and we do expect first exports from Corpus Christi T2 to be in early Q3 19.
We did see a development with the 4.0 Mtpa Cameron LNG T1, which applied for FERC approval to export a commissioning cargo as early as 16 May. While that export is unlikely to happen so soon, cargo-tracking data show a vessel arriving on 27 May, suggesting first export soon after.
|Fig 1: Chinese imports of US LNG, Mt||Fig 2: Shipping rates, $/t|
|Source: Kpler, Energy Aspects||Source: Fearnleys, Energy Aspects|