New US LNG to strain EU terminals

Published at 14:36 8 Oct 2019 by . Last edited 15:42 8 Oct 2019.

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The ramp-up in liquefaction at three new US export facilities started slowly but is gathering pace. We expect the terminals to add 2.35 Mt to global supply in Q1 20. This is despite Cameron LNG declaring a force majeure (FM) in early September, a recent drop in feedgas to Freeport LNG, and Kinder Morgan planning to add its small liquefaction trains at Elba Island at a rate of just one a month. The new supply from these plants on top of y/y growth from other LNG projects will put TTF Q1-20 prices under more pressure and strain regasification capacity at some European terminals.

The 4.0 Mtpa Cameron LNG, operated by US firm Sempra Energy, on 1-7 October took in feedgas at a rate slightly above its nameplate capacity—equivalent to almost five standard-sized cargoes a month. It looks like the technical problems which had led Cameron LNG to declare an FM on 13 September are either over or are not limiting output. Given the strong recent feedgas flows, we expect the plant to be operating around nameplate capacity in the coming months and over Q1 20. Exports from the plant will be further boosted in February 2020 and June 2020 with the start-up of the second and third equally-sized liquefaction trains, respectively.

Freeport LNG received reduced feedgas in recent days, after flows in line with nameplate capacity in late September. Feedgas on 1-7 October dropped to the equivalent of under two cargoes a month from five cargoes a month on 25-30 September. The reason for the drop is unclear but we think it is unrelated to technical problems in August relating to a failed flange gasket, which is a pipe join. Facilities can ramp up and down in the commissioning process. We think it is likely that Freeport LNG will be able to produce at capacity by the start of Q1 20, particularly given the quick feedgas intake in late September. Freeport LNG’s next loading is scheduled to be onto the Seri Balqis on 9 October.

Elba Island finally underway

Kinder Morgan’s Elba Island facility, made up of 10 small (0.25 Mtpa) trains, only commercially started its first train on 4 October. Kinder Morgan has said that it would target starting-up one train per month, implying 1 Mtpa of capacity online in January 2020 and the facility only reaching full capacity in June 2020. We estimate that the facility will only add 0.25 Mt to global LNG production in Q1 20—around 3.5 standard-sized cargoes in the period.

The project had been delayed several times, with Kinder Morgan initially having applied to the US federal energy regulatory commission (FERC) to start the plant in April 2019. There were reports of mechanical issues at the plant in July and Hurricane Dorian in late August likely further delayed the project. Shell is the sole offtaker from the facility, under a 20-year agreement.

Some European terminals will struggle to absorb the extra LNG in Q1 20

We expect the three new US plants to contribute 2.35 Mt to global supply in Q1 20, on top of a y/y liquefaction capacity increase elsewhere of 5.75 Mt y/y. We anticipate demand growth outside of Europe only absorbing 4.09 Mt more y/y, leaving around 3.79 Mt more for Europe to take (see LNG Outlook, 30 September 2019).

Some European import terminals will struggle to absorb the additional LNG in Q1 20. The Netherlands’ Gate terminal was already running at 68% utilisation in Q1 19, offering capacity to take an additional 0.74 Mt that quarter. Further increases in supply pushed Gate up to 100% utilisation in April, when LNG imports were at a record high in Europe. Gate is a key terminal for getting supply to Germany and the Netherlands where there is the highest potential in Europe for coal-to-gas fuel switching in the power sector. Other terminals in Northwest Europe are more limited by pipeline capacity in delivering to these market areas. Europe’s power sector and underground storage are the two main sources of incremental demand which will allow the continent to absorb increases in supply.

Spain will have ample spare regasification capacity in Q1 20, but downstream demand for sendout is limited by how much incremental coal-to-gas fuel switching potential remains in the power sector and the lack of further ability to turn down Algerian pipeline supply (see Panorama: PVB netbacks hinge on Algeria supply, 2 October 2019). Demand for sendout from cargoes arriving Q1 20 will be further capped by firms planning to regasify the high inventories they have stored at LNG terminals this year. There will be no incentive to store newly imported cargoes at the terminals unless Q1-20 prices drop to an unusual discount to contracts for delivery in the summer.

There will also be considerable spare regasification capacity at UK terminals, based on sendout in Q1 19. The UK is likely to be a recipient of much of the additional LNG supply, given that the liquidity of the NBP near-curve makes it easy to sell forward supply. The NBP Q1-20 market has already tightened its premium to the TTF, compared with the same geographic spread for Q1-19 a year earlier. The tighter spreads will discourage brisk UK imports through its interconnectors with the Netherlands and Belgium. Quick LNG receipts will further weaken NBP Q1-20 prices against continental hubs.

Cargoes being floated for storage may also contribute to congestion at terminals in Q1 20, particularly if their delivery is in January-February 2020, when the cargoes’ sellers would have been able to get the highest price from forward sales. Kpler cargo-tracking data on 7 October indicated 12 floating cargoes globally, of which nine were in the Atlantic basin and five were near Europe.

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