Analysis: Global LNG supply cuts are inevitable but who will blink first, and when?
Singapore — Global LNG markets see supply curtailments at LNG production facilities as the only way to help rebalance demand and supply as natural gas prices hit record lows, and there’s little demand support on the horizon with the pandemic still raging out of control.
These prices are much below the breakeven costs of many LNG producers and make a strong case for companies to cut their losses by turning off the taps.
But while shut-ins are inevitable, and some producers will be more affected than others, the scaling back of LNG supply is likely to be spread across a wide swathe of producers with highly competitive project economics.
In addition to shut-ins, a range of other market mechanisms, from storage and shipping assets to competing pipeline gas supply, will also help bring the LNG market back into equilibrium, underscoring the development of the LNG marketplace in the past decade.
It is important to put the scale of LNG demand destruction into perspective.
While global oil demand is on track for its sharpest decline since crude became a tradable commodity, LNG demand is still expected to grow in 2020 despite shut-ins, something that can’t be said for most industries in this crisis.
Global oil demand is expected to fall by a record 9.3 million b/d year on year in 2020, the International Energy Agency said on Wednesday.
“We expect the LNG market to grow by roughly 19 Bcm this year, which is about 4% growth. This compares to last year when demand grew 47.5 Bcm from the previous year at a rate of 11%,” Jeff Moore, Asia LNG manager at S&P Global Platts Analytics, said.
WHO BLINKS FIRST?
US LNG, due to higher transportation costs to Asian markets and high breakeven shale economics, has been in the crosshairs for shut-ins. The Platts Gulf Coast Marker, which reflects the economics of US LNG exports, fell below Henry Hub last month, meaning the LNG exports were no longer profitable.
US LNG also appears to be disadvantaged in a crisis — Asian customers only have to pay the tolling fee as penalty when cancelling a US LNG cargo, while cancelling an Australian or Qatari LNG cargo triggers a take-or-pay cost for the full shipment.
But the dynamics of US LNG are not so straightforward.
Platts Analytics’ Moore said even if shale wells were shut-in due to poor economics, it doesn’t necessarily translate into lower liquefaction volumes, and lower associated gas production could actually support Henry Hub prices and allow gas production to pick up.
In fact, US LNG growth will drive global LNG market growth in 2020.
“With new infrastructure, the US will still certainly grow their exports over last year’s levels. This growth is already largely locked in … as the US produced about 49 Bcm in total last year, and will have produced more than half that by the end of this month,” Moore said.
Outside the US, most floating LNG producers sit on the higher end of breakeven costs, such as Shell’s Prelude FLNG with an estimated breakeven cost of over $8/MMBtu, and state-run Petronas’ FLNG 1 and FLNG 2.
Australia’s Gladstone terminals — Origin Energy-ConocoPhillips’ Australia Pacific LNG, Santos-led Gladstone LNG and Shell’s Queensland Curtis LNG — are on the higher end of the cost spectrum, while producers like Qatar are at the lower end for both gas costs of under $2/MMBtu and liquefaction costs of about $1.79/MMBtu.
Origin Energy’s estimated distribution breakeven for financial year 2019-2020 was $29-$32/boe and Santos said theirs was around $29/boe, Graeme Bethune, head of Australian consultancy EnergyQuest, said, adding that the bigger issue for them is having enough gas.
“Also, APLNG went to tender for 6-12 spot cargoes in December and would have realized prices in the low US$3s, suggesting this was at least breakeven,” he added.
The question is whether Australian LNG supply can be protected by its contracts if oil falls to single digits. Platts Analytics expects ICE Brent to fall to $20/b or below in the second quarter as crude storage runs out as early as May, pushing oil-linked LNG prices to less than $2.80/MMBtu.
At the very tip of the LNG operating expenditure curve, it is possible that around 1 Bcf/d or 10.3 Bcm/year of LNG could be shut-in, or undertake extended maintenance or repair, Citigroup managing director Anthony Yuen said in a report last week.
“The base case demand impact in the global LNG and European gas markets due to COVID-19 could reach [around] 22 Bcm, with China accounting for [around] 8 Bcm. The bear case demand impact globally could reach 42 Bcm,” Yuen said.
Platts JKM spot LNG prices have dropped below $2.3/MMBtu, with bearish sentiment prevailing, and oil-linked term LNG prices have plummeted to $4.20/MMBtu with no hope for recovery as crude prices failed to respond to production cuts by OPEC and Moscow.