LNG market weakness to put Maurice Brand’s LNG Ltd to the test

LNG market weakness to put Maurice Brand’s LNG Ltd to the test

A shiver ran up the collective spine of the liquefied natural gas supply sector this week as reports emerged that India’s Petronet was set to break its long-term contract to buy LNG from Qatar.

Prices were so low in the spot market, the report went, that India’s biggest importer of LNG was willing to risk incurring penalties on its 25-year contract with Qatar’s RasGas  rather than keep on buying its full allotment of gas at higher prices.

Only a few weeks earlier, news that China’s state-controlled oil giant CNOOC would seek to re-sell two LNG cargoes from BG Group’s Queensland Curtis plant had rattled the market.

Platts prices for spot LNG in north-east Asia for October average just $US7.54 per million British thermal units, down from around $US20 early last year.

It is in this environment that aspiring US LNG exporter Liquefied Natural Gas Ltd is aiming to lock customers into long-term contracts to use its proposed Magnolia export terminal in Louisiana.

As Asian LNG prices have dived, some are questioning the whole viability of US LNG exports.

Zin Smati, head of the North American business of Engie, formerly GDF Suez, was quoted last week as saying “nobody” could make money from US LNG exports at present: the price advantage that US exports had over Asian prices has vanished as oil prices dive.

The Maurice Brand-led LNG Ltd is already suffering a crisis of confidence in a market where it had until recently been a firm favourite. After being the S&P/ASX200’s fourth-best performer in the June half, it is now among the worst for the year-to-date, the stock sliding from $5 in late April to a low of $1.23 this week.

Delays in LNG Ltd signing up customers and finalising an engineering contract has added to the turmoil that has gripped the whole of the resources sector.

Now, in this fourth quarter, the assurances Brand has given to shareholders will be put to the test. He has given early this quarter as the revised date for finalising the engineering contract for the Magnolia plant with KBR and South Korean firm SKE&C, while at least one of the preliminary agreements with customers is to be firmed into a contract by December.

Brand admits that the concept of US gas exports is a harder sell at present. But he says the various motivations of his potential customers to sign up for capacity at Magnolia haven’t changed. Nor has the advantage in gas pricing enjoyed in the US, where the abundance of gas close to pipelines ensures much cheaper prices than for LNG plants in Queensland for example.

He says customers are still looking long-term, wanting to secure access to US LNG exports no matter how unfavourable the economics look at present.

“Each of the parties we are talking to is still talking 20-year deals,” Brand says.

Some hedge funds remain skeptical. One points in particular to Spain’s Gas Natural Fenosa (GNF), which has provisionally agreed to take up to 2 million tonnes a year from Magnolia, a quarter of total capacity.

GNF has the option of buying LNG on the spot market, or taking capacity from a US exporter that is further down the development path and has spare capacity such as Cheniere Energy. Then there’s the huge gas discovery that Italian oil major ENI has made off Egypt that Fenosa could access to revive its idled Damietta LNG plant in the country, the portfolio manager says.

With Magnolia targeted for financial close by March 2016, Brand has the next few months to silence the doubters.


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