Analysis: Global trade flows in focus as LNG2019 conference set to begin in key importer China’s backyard
The United States is expected to account for more than 80% of all new liquefaction capacity set to come online this year worldwide, at a time when tit-for-tat tariffs with a key buyer — China — continue to impact trade flows.
A report Monday issued by the International Group of LNG Importers said bridging those differences will be important to ensuring the affordability and flexibility of the additional supplies.
The report comes as global market leaders meet this week in Shanghai to discuss the state of the industry. It’s an inflection point for participants in the market for the chilled power plant and home heating fuel.
On the one hand, strong demand is being led by end-users in Asia and Europe, while forecasts point to tightening supply in the next few years, which is traditionally an impetus for new infrastructure. On the other hand, like historically has been the case in the oil industry, geopolitics is now a potential headwind for the LNG market.
“For LNG importers, long-term partnerships, destination and volume flexibility as well as the ability to optimize, or arbitrage, between Asian and European markets remain key,” said Jean-Marie Dauger, president of the industry group that released the report.
The week-long conference that begins in earnest Tuesday will hear from just about every major player in the LNG space that will be impacted by the convergence of market forces, from big producers in Qatar, Australia and the US to large importers in Japan, South Korea and, of course, China. Developers of new facilities, especially in the US, will be jockeying to remain relevant in the conversation.
Sempra Energy said Monday that its proposed export project at the site of the Energia Costa Azul regasification terminal in Baja California, Mexico, received two authorizations from the US Department of Energy. One approval allows it to export US-produced natural gas to Mexico and the other allows it to re-export LNG produced at Energia Costa Azul to countries with which the US does not have a free-trade agreement.
In November, Sempra reached preliminary agreements with offtakers that, if finalized, would cover all of the liquefaction capacity for the first phase of the export project at Energia Costa Azul. It said at the time that the heads of agreement with affiliates of France’s Total and Japan ‘s Mitsui and Tokyo Gas put it on target to make a final investment decision on the project by late this year.
Talks have since picked up, and now San Diego-based Sempra is eying a possible expansion beyond the up to 15 million mt/year of capacity proposed for the two-phase project. S&P Global Platts Analytics estimates that the Costa Azul facility will save LNG exporters around $1/MMBtu of shipping costs to the premium East Asian markets, which could give it a cost advantage over its US Gulf Coast competition. Furthermore, the facility avoids the heavily trafficked Panama Canal, which showed signs of constraint last year.
One risk: New midstream projects in Mexico have faced exceptional delays over the past several years due primarily to localized land rights disputes and a poor institutional resolution system, which will likely translate to greater implied construction risk for the Costa Azul export facility.
Meanwhile, NextDecade has promised the market that it will disclose what it is describing as a major announcement Tuesday morning at the conference about its proposed Rio Grande LNG export terminal project. The Houston-based company previously said it expected to announce initial long-term contracts to support its project in the first quarter, which ended Sunday. A final investment decision is expected in the third quarter, with commercial operations targeted to begin in 2023.
“It lookslike there are two camps forming — haves/have nots,” Wells Fargo Securities analyst Michael Webber said in a March 29 note to clients. “Again, it warrants reiterating that significant hurdles remain, and tangible results will be what matter.”