An unusually active Atlantic hurricane season has tested the resilience of US liquefaction infrastructure that is still in its infancy relative to terminals in more mature exporting nations.
Utilization is starting to rise toward pre-pandemic levels, as demand and price recovery in buyer markets in Asia and Europe are incentivizing exports.
While the trend could quickly turn around – depending on further storm damage and planned or unplanned maintenance – higher consumption during the approaching winter could provide the commercial lift the industry needs to sanction new projects in 2021.
The dynamics reflect the competitive benefits that cheap feedgas and destination flexibility have given to Gulf Coast operators since Cheniere Energy shipped the first LNG cargo from the Lower 48 states from its Sabine Pass terminal in Louisiana in 2016.
What a difference 6 months makes
A wave of cargo cancellations from US terminals began in April, a few at first, then several dozen a month during the summer. Low international prices and demand destruction due to the coronavirus were to blame.
With prices for spot deliveries to Northeast Asia on the rebound as global consumption recovered, cargo cancellations for October were the fewest since May, according to market sources. The Platts JKM for November recently hit highs not seen since December 2019, and was assessed Oct. 13 at $5.588/MMBtu. Besides robust end-user demand in Asia, there has been bullish sentiment from European gas markets of late.
US exporters are largely protected by fixed fees they receive when customers cancel, although cancellations force them to lower production, and if a counterparty were to claim force majeure that could pose a challenge. Cheniere’s optionality from having two terminals in different locations along the Gulf Coast, and its full-service model, helped it during the slide in demand.
The biggest impact from the rollercoaster ride for US LNG has been a virtual cessation of new long-term supply deals for existing and proposed liquefaction facilities.
With positive spreads between the US Henry Hub price and end-user markets, the ramp-up in terminal utilization should gain steam in the near-term, in a bullish sign for overall demand for US LNG.
Feedgas deliveries to US terminals was steady in early October near 8 Bcf/d, and that was despite Dominion Energy’s Cove Point in Maryland being down due to annual maintenance and Sempra Energy’s Cameron LNG in Louisiana just starting to ramp up after being offline more than a month due to damage from Hurricane Laura in late August.
Cameron was expected to continue to boost feedgas flows, after it exported its first cargo since shutting down, on Oct. 5. Cove Point resumed production Oct. 12 after completing maintenance. Both developments were positive signs for US LNG terminal utilization.
Weather and buyers are wildcards
Tropical weather continued to brew in the Gulf in the first weeks of October. Hurricane Delta made landfall in southern Louisiana on Oct. 9, weakening at least temporarily both offshore production and US Southeast feedgas demand.
On the demand side, Japan was the largest buyer of US LNG in September, in line with August, and Chinese deliveries picked up as Gulf Coast netbacks from Asia strengthened from lows seen during the height of the summer. China increased its buying, taking four US LNG cargoes in September, two more than over August, while deliveries to South Korea were muted amid rising nuclear generating capacity.
In the months ahead, Asia’s appetite and Europe’s balancing power will be key to whether US LNG’s rebound has staying power or will be short-lived