Why reload?

Published at 11:05 2 Jul 2019 by . Last edited 11:18 22 Aug 2019.

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With the outlook for the TTF no more constructive than it was last week, the remainder of summer 2019 will be marked by gas hunting for storage capacity to fill. With EU storage filling rapidly, the market could either turn to underground storage in the US or floating cargoes on the water. With the forward market struggling to close the US arbs, the hunt to take advantage of the steep contango in the JKM and TTF curves could be starting to focus more on the latter. Indeed, the fairly odd move back to reloading cargoes out of EU regas facilities is far better explained by participants looking to take advantage of the seasonal contango (well over 2 $/mmbtu) rather than taking advantage of the near-term cross-basin contango (just over 1 $/mmbtu).  

Who, why, where – reloading now raises questions

In a summer of unusual activity in the global gas markets, a key oddity is the news of LNG cargo reloads at European terminals. A variety of reports identify a number of ships as looking to reload. The British Sponsor was marked as heading to Zeebrugge empty, while the Marvel Crane, Maran Gas Troy and Shinsu Maru were all reported to be loading cargoes at Gate.

European reloads are not that unusual for the LNG market, as they have been used throughout the last few years to take advantage of arbitrage opportunities presented by periodically high JKM premiums to European hubs. What makes the current number of reloads so unusual is that given current shipping rates, the JKM-TTF spread would need to be around 2.33 $/mmbtu to make a trade economic between Europe and China. That figure does not account for any of the costs of having already discharged and stored LNG in European tanks (i.e. the variable transport costs to Asia). Given the current curves, none of the meaningful cross-hub spreads make that trade economic. A spot TTF to an M+1 JKM only gives around 1.37 $/mmbtu, a long way from profitable.  So why the reloads now, when the inter-basin spreads are not supportive?

The answer could be in the contango in the global gas curves. The Aug-19–Nov-19 spread is currently pricing at -2.44 $/mmbtu at the TTF, and the cross-basin seasonal spread would provide -2.89 $/mmbtu. Given these prices—and ninety-day floating storage likely to cost around $1.95 $/mmbtu—either of these contango trades look profitable now. The current seasonal play could lead to some floating cargoes being used as storage to be sold into either the JKM or the European market. In essence, summer global balance is now about sniffing out available gas storage capacity, and with EU storage filling rapidly, that could either be underground storage in the US or floating cargoes on the water.

Oh Canada…more export terminals?

After seeing the sizeable Shell-led 13 Mtpa LNG Canada take an FID in Q4 18, the prospects for other projects exporting gas did not look all that promising, especially following a large number of high-profile cancellations. The cancellations include the 14 Mtpa Petronas-led Pacific North West project, the ExxonMobil-led 15 Mtpa WCC project and the 20 Mtpa Woodside-led Grassy Point project. After all of those knock-backs, some progress was seen as the smaller 2.0 Mtpa Woodfibre LNG project announced it had signed a 15-year, 0.75 Mtpa binding SPA with BP, with first delivery expected in 2023. BP is also looking to provide gas transportation and balancing services to the Woodfibre LNG export facility. This does make a Woodfibre FID more likely.

In another Canadian development, Pieridae Energy announced it had signed a deal to acquire all of Shell’s midstream and upstream assets in the southern Alberta Foothills. Shell’s assets in the deal currently produce approximately 0.12 bcf/d of natural gas, as well as some NGLs, condensate and light oil. The company entered into a deal to acquire feedgas for the 10 Mtpa Goldboro LNG facility, which is located on the Canadian East Coast, pointing LNG exports more firmly at the European market. The Goldboro project has a 20-year SPA with Uniper for the full 5 Mtpa output of Train 1 and has an agreement with Axpo for 1 Mtpa of train 2. The project is targeting an FID this year, although we think it will need to place at least another 2 Mtpa of supply in long-term contracts before a positive decision to proceed can happen.   

Is Darwin surviving?

As Australia has been one of the fastest-growing LNG producers over the last five years, a report from the Australian government that lowered its LNG export forecasts for the 2020–21 fiscal year came as something of a surprise. It still expects to see growth in the current fiscal year, adding some 6.5 Mtpa of supply as it takes into account the start-up of the 3.6 Mtpa Prelude project and the ramping-up of the 4.2 Mtpa Ichthys T2 facility. But the Australian government now sees this as peak, and it expects exports to start to decline due to lower output at the 3.7 Mtpa Darwin LNG, although the decline in 2020–21 is forecast to be limited to just 0.1 Mtpa y/y.

Further years would see stronger declines after ConocoPhillips’s June announcement that it expects the Darwin LNG plant to close for one to two years between 2021 and 2023, when gas from the Bayu-Undan field in the Timor Sea is exhausted. Complete closure of the project would wipe out some 3.6 Mtpa that the project has produced in the last 12-month period, suggesting that the second half of 2021 through 2022 could see more dramatic declines in Australian exports. The Darwin project is looking for gas to backfill the lost production from the Bayu-Undan field and has entered into exclusive negotiations to supply backfill gas with the Conoco-Phillips-Santos JV Barossa project. That project is in the FEED stage and is unlikely to be able to put first gas into an LNG plant any time before 2023. Eni’s Evans Shoal field has also floated the idea of supplying production to Darwin, but that now looks less likely with the exclusivity given to Barossa.

Another potential slowdown in supply growth, although one we flagged previously (see Global LNG Monthly: Middle East and North Africa, 28 March 2019), was Delek announcing that commercial gas flows from Israel to Egypt will only start when Leviathan comes online at the end of 2019. Those exports should allow more Egyptian gas to be exported through Idku in 2020.

Fig 1: Global gas spreads, $/mmbtu Fig 2: Darwin weekly exports, Mt
Source:  CME, Refinitiv, Energy Aspects Source: Kpler, Energy Aspects

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