As LNG booms, some fear bubble

James Osborne Nov. 7, 2019 houstonchronicle.com/business/energy

WASHINGTON - For years, LNG developers have sold investors on multi-billion dollar export projects based on the premise of the world’s insatiable appetite for natural gas.

But three years after Cheniere Energy made history by exporting the first shipment of liquefied natural gas from the continental United States, energy insiders are debating whether an LNG bubble is developing around the vast sweep of projects scheduled to come online over the next 10 years.

From Russia to Qatar, Mozambique to Canada, the oil and gas industry has enough projects in the works to almost double global LNG production by 2030, with much of that growth focused along the Texas and Louisiana Gulf Coast. As analysts crunch the numbers, some do not believe the demand is there to support them all.

“There’s a fairly significant divide about the degree people might be overbuilding,” said Jason Feer, the Houston-based global head of business intelligence at Poten & Partners, a shipping advisory firm. “My take is some people are wildly optimistic about demand. We found this wide range of forecasts, some of them physically impossible.”

Forecasts of LNG’s meteoric rise largely hinge on expectations of rising demand in China, India and developing nations in Southeast Asia, all of which have limited domestic supplies of natural gas. But governments there have been slow to shift from cheap coal — which they have in abundance — to undertake the vast pipeline, storage and terminal buildouts necessary to shift their economies toward gas.

Already,there are signs that Asia’s appetite for LNG might not be as reliable as developers would hope.

Global LNG imports this summer were up 11 percent from last year, but almost two thirds of that additional gas went into storage in Europe and not Asian markets, said Mike Fulwood, a senior research fellow at the Oxford Institute for Energy Studies in the United Kingdom.

That has resulted in storage tanks in Germany and the Netherlands at near capacity - typically they would be at 80 percent at this point in the year - pushing prices there to around $3.30 per million British thermal units, or MMBTUs, well below the point at which it its profitable to import U.S. LNG. At the same time Russia is building new pipelines into Europe and is looking to expand its LNG facility near the Arctic Circle.

“All this surge into LNG into Europe is not because Europe wants or needs LNG. It’s because it has nowhere else to go,” Fulwood said. “The problem is if we get this perfect storm of events, like a mild winter, Russia keeps pumping out pipeline gas and China’s growth is a bit weak. In that scenario, you have LNG pushing a supply gap that no longer exists and then prices crash.”

Half full

For certain, the LNG pessimists are dwarfed in numbers by the optimists, for whom the boom of fracked gas in the United States makes a perfect match for a warming planet trying to reduce the burning of carbon-intensive coal.

Massive, risk-adverse companies like Exxon Mobil and Royal Dutch Shell, not to mention state-owned operations in Qatar and Russia, are all pumping billions of dollars into developing LNG export projects to have them ready six years from now when forecasters predict existing facilities will be maxed out.

“Everyone wants a piece of this market. They’re saying we’re in danger of losing market share if we don’t start building out capacity,” said Alex Munton, an energy analyst with the consulting firm Wood Mackenzie. “You’ll continue to move through these cycles, like we saw this year, and spot prices have come down in a big way. But gas demand still has a bright future relative to other [fossil fuel] commodities.”

In the early years of the U.S. LNG wave, companies would get 20-year contracts for almost their entire output before beginning construction. If their customers later decided they didn’t want the gas, they could cancel the shipment, but would still be on the hook for a roughly $3 per MMBtu infrastructure fee.

That left those developers virtually no risk - the money they would make on the gas delivery itself was minimal, Munton said.

But with so many LNG developers now competing to sign on customers, companies are having to offer more generous terms and take on more risk themselves. Exxon Mobil and Qatar Petroleum agreed to build the Golden Pass LNG facility in Sabine Pass without announcing any long-term contracts, which analysts have interpreted as a plan to sell most of the LNG on the spot market, betting gas prices will rise or at least hold steady.

The Houston firm Tellurian, which is trying to build an export facility in Louisiana, is offering customers an equity stake in its LNG facility and associated pipeline in exchange for signing on to a long-term contract. And Venture Global, which announced earlier this year it was moving ahead on its Calcasieu Pass facility in Louisiana, has reduced the infrastructure fee it’s charging customers through a new and cheaper construction model that uses modular equipment built off-site to chill and liquefy natural gas.

At a time gas prices are falling, companies are betting — hoping — the market will turn around by the time their facilities are built.

“LNG takes five to seven years to build, and they’re saying, if I don’t pull the trigger now I won’t have the volumes to sell,” Feer said. “You’ve got all this LNG that’s looking to hit the market in 2023 and 2024 and a lot of that volume is uncommitted.”

But LNG developers say they’re not worried. Tellurian is forecasting the world needs an additional 250 million metric tons of new LNG supply by 2023 — far in excess of Poten & Partners’ forecast of 120 million tons of new demand by 2030.

“LNG is now a commodity and in the commodity business, low cost wins,” Joi Lecznar, a spokeswoman for Tellurian, said in an email.

Too much LNG

But how much risk are investors willing to take on a business that really only came into its own in the last decade?

Some may be starting to get cold feet. After taking years to work their way through the government approval process, some developers such as Tellurian and Texas LNG, a Houston company planning an LNG export complex in Brownsville, have pushed back final construction decisions, a sign they are still trying to sign on more customers, analysts say.

But with larger state-owned and multinational companies, such as Shell and Qatar Petroleum, pressing ahead on LNG projects, there is little sign of the building boom slowing down.

“There’s too much LNG out there already, but industry keeps building more capacity,” said Nikos Tsafos, a senior fellow at the Washington think tank Center for Strategic and International Studies. “The question is whether this market will be there when all this additional supply hits.”

 

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Gas ‘Witch’s Brew’ Has U.S. Exporters Facing Worst Scenario

  Naureen S. Malik and Anna Shiryaevskaya  BloombergNovember 25, 2019

 

(Bloomberg) -- A global glut of natural gas has gotten so massive that U.S. exporters could soon face their worst-case scenario: Halting shipments to get supply and demand back in balance.

Prices for the heating and power-plant fuel may collapse in Europe and Asia next year to levels that would force U.S. liquefied natural gas suppliers to curb output, Citigroup Inc. said in a note to clients last week. Morgan Stanley sees as much as 2.7 billion cubic feet a day of American exports curtailed around the second or third quarter, assuming normal weather. That’s about half the volume now being sent abroad.

China’s demand for U.S. LNG has plunged amid the trade war, while Europe’s gas storage is almost full and tankers carrying the fuel are taking unusually long journeys in search of better prices. That’s created a “toxic witch’s brew” that’s making it harder to find a home for American exports, according to Madeline Jowdy, senior director of global gas and LNG for S&P Global Platts in New York.

“It’s also a harbinger of bigger troubles ahead for U.S. exporters in the second quarter of next year, when global demand is at its weakest point and the U.S. will have even more volumes to place” as new export terminals start up, Jowdy said in an email.

Capping LNG production is an extreme measure, but the idea is gaining traction as new terminals from the U.S. to Australia unleash exports faster than demand can catch up. Gas for near-term delivery in Asia has lost half its value in the past 14 months, with the Dutch benchmark nearly matching that decline. A mild winter would make the glut even worse -- bad news for U.S. suppliers like Cheniere Energy Inc. and Sempra Energy.

In the past three years, soaring gas output from shale basins has vaulted the U.S. into the ranks of the world’s largest LNG producers. The nation is widely seen as a so-called swing supplier because its exports can respond quickly to a volatile market.

Curtailments can happen when customers such as trading houses, which resell the fuel to utilities and other end users, refuse to load cargoes because prices are too low to cover shipping costs and still make a profit. The cancellations can force exporters to cap, or “shut in,” LNG production as their storage tanks fill up.

While customers of American LNG export terminals have to pay a fee to reserve the fuel under long-term contracts, they can opt out of buying with 30 to 60 days’ notice. That’s in contrast to traditional contracts from suppliers like Qatar and Australia, which require buyers to take or pay for a fixed amount whether they need it or not.

Singapore’s Pavilion Energy Pte said this month that it canceled the loading of an LNG cargo from the U.S., though Pavilion said the decision was based on logistics and didn’t directly attribute it to low gas prices. But additional shut-ins of American exports could follow, Michael Webber, managing partner of Webber Research & Advisory LLC, said in an email.

With the exception of the Pavilion cargo, though, buyers of U.S. LNG have continued to load shipments. Traders will likely need to have a view of at least two months out to cancel, Peter Abdo, chief commercial officer for LNG and origination at Uniper Global Commodities SE, said at the Bloomberg Commodity Investor Forum in London this month. Uniper doesn’t plan to refuse cargoes, he said.

The top executive at Cheniere, the largest U.S. gas exporter, has dismissed concerns about shut-ins.

The question “never ceases to amaze me,” Chief Executive Officer Jack Fusco said during the company’s third-quarter earnings call last month. Cheniere’s cargoes “are extremely competitive,” Fusco said. A representative for Cheniere declined to comment on possible LNG production curtailments, while Sempra declined to discuss commercial arrangements.

So far, the premium for winter gas over near-term prices has spurred record American shipments. But European gas prices could potentially slip below $3 per million British thermal units in the spring and summer, potentially forcing U.S. exports to shut in, Citigroup said in its report. Gas at the Dutch Title Transfer Facility is now trading near $5.

Benchmark gas prices in the U.S., Europe and Asia are expected to remain under pressure next year from strong supply growth, Goldman Sachs Group Inc. analysts said in a research note Monday.

 

Gunvor to Market Liquefied Natural Gas Produced at $4 Billion U.S. Export Project

  Naureen S. Malik November 25, 2019

(Bloomberg) -- Gunvor Group Ltd. agreed to double the maximum amount of liquefied natural gas it plans to buy from a $4 billion export project in Louisiana and said it will recruit additional customers for the terminal.

The trading firm will purchase as much as 3 million tons of LNG per year from Commonwealth LNG, the Houston-based developer said Monday in an emailed statement. Gunvor will also market the remaining volumes from the facility, which will be able to produce about 8.4 million tons a year. Commonwealth aims to make a final investment decision in 2021 and begin exports in the second quarter of 2024.

The pact is unique in that it allows Commonwealth to shift the burden of finding buyers onto a third-party marketer. LNG developers need to sign enough customers to secure financing, and competition is intensifying. New terminals from Russia to Australia are flooding the market with supply, while the trade war has made it all but impossible for American exporters to sign deals with Chinese buyers.

Trading houses, meanwhile, are becoming bigger players in LNG project development. Cheniere Energy Inc., America’s first and biggest shipper of shale gas, struck a 15-year agreement last year to sell the fuel to Vitol Group. Gunvor is on course to lead LNG ship charters this year after seeing its trading of the super-chilled fuel jump in 2018.

With Gunvor’s backing, Commonwealth will create “the lowest-cost offering on the U.S. Gulf Coast,” Kalpesh Patel, co-head of LNG trading at Gunvor, said in the statement.

Gunvor had reached a preliminary agreement with Commonwealth in June to buy 1.5 million tons of LNG a year for 15 years. Commonwealth may look for more creative ways to price its cargoes such as linking contracts to oil or to foreign gas indexes, even as the U.S. Henry Hub benchmark gains clout, Chief Executive Officer Paul Varello said that month.

To contact the reporter on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Christine Buurma

For more articles like this, please visit us at bloomberg.com

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