ANALYSIS: Pandemic-fueled summer blues set in at US Gulf Coast LNG export facilities

Houston — Weak LNG prices and unfavorable economics for deliveries to Asia and Europe suggest US export volumes will remain depressed through much if not all of the summer and perhaps beyond.

Operators are pulling forward maintenance, shutting down units and working to control costs as they seek to manage the lower production levels that are symptomatic of reduced global demand and trade flow disruptions due to the coronavirus pandemic.

With the number of cargo cancellations reported for July approximately double the count for June, and questions about the extent of a possible recovery in August, the US market is expected to face pressure for the foreseeable future. Fixed-fees that exporters receive when shipments are canceled will blunt the pain. But new US terminals are not likely to be sanctioned in this environment.

Based on total feedgas flows to the six major US liquefaction facilities on June 2 of 3.57 Bcf/d – the lowest level in almost 14 months -- utilization stood at approximately 35%, according to S&P Global Platts Analytics data.

In addition to sharp drops in gas deliveries to Freeport LNG in Texas and Cheniere Energy's Sabine Pass in Louisiana and Corpus Christi Liquefaction in Texas, flows to Sempra Energy's Cameron LNG in Louisiana were down about 500 MMcf/d compared with a week earlier. There, Train 3, which is still in the commissioning process, has been temporarily shut down for maintenance.

One exception has been Dominion Energy's Cove Point terminal, where recent flows were down only slightly from capacity. A Dominion spokeswoman would not comment on whether any cargoes have been canceled for the summer months, but she said the Maryland facility does not anticipate exposure to customer claims of force majeure.

Delivered LNG prices remain weak in the near term.

The Platts JKM benchmark for delivered LNG prices into Northeast Asia was assessed at $2.025/MMBtu for July at the end of June 2, while the Platts DES NWE marker for July cargoes into Northwest Europe closed on the same day at $1.597. The Platts DES MED for deliveries into the Mediterranean in July was assessed at $1.672/MMBtu for the same day.

With the price of shipping to Northeast Asia from the US Gulf Coast currently assessed at 75 cents/MMBtu, and into Western Europe at around $0.30/MMBtu, US exporters would find little difference between the two markets.

With the slump in global LNG demand relative to available supply, the value of US-sourced LNG cargoes has remained relatively depressed. Since the end of March, the value of a spot cargoes loading in the US Gulf Coast has been below the equivalent NYMEX Henry Hub front-month contract. The Platts Gulf Coast Marker was assessed at $1.30/MMBtu on June 1, while the NYMEX futures price for the equivalent period was assessed at $1.774/MMBtu, resulting in a spread of almost 50 cents/MMBtu.

FORWARD CURVE

Based on a forward curve analysis done on May 28, Platts Analytics expects negative economics on US-loading cargoes until around October, when a sharp recovery in Asian prices is expected.

Declining shipping rates in the Atlantic since the middle of April have been a positive sign. Another near-term positive for US LNG exporters: the remainder of the NYMEX Henry Hub summer strip has weakened considerably over the last month. As of June 1, the July-September 2020 contracts averaged $1.856/MMBtu, down nearly 40 cents from averaging $2.226/MMBtu on May 1, according to Platts Analytics data.

That trend points to lower input costs for LNG exporters, after May saw a brief bump, likely because of expectations that associated gas volumes would come off due to the crude oil price collapse.

NEW PROJECTS

As of late March, feedgas flows to US LNG export terminals were approaching 10 Bcf/d, and while final investment decisions for some new US liquefaction projects were put off, there was still the possibility of two or three FIDs during the balance of 2020

Then the wave of cancellations at existing terminals began, and the full breath of the sweeping changes in the global market fueled in part by the pandemic came into clearer focus.

Shell pulled out of its Lake Charles LNG joint venture with Energy Transfer in Louisiana and Sempra Energy delayed FID on its proposed Port Arthur LNG in Texas to 2021. NextDecade also delayed FID on its Rio Grande LNG project in Texas to 2021, while Tellurian, which was unable to finalize an equity investment by India's Petronet, stopped issuing a timeline for taking FID on Driftwood LNG in Louisiana.

In Mexico, Sempra continues to target FID on its Energia Costa Azul export project by the end of June, though a spokeswoman said that is subject to receiving an export permit from Mexico's government and the relevant office remains closed due to the pandemic.