London — Egypt may find it difficult to find buyers for its LNG under 12-18 month term deals priced at $5/MMBtu, analysts believe.
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The Egyptian oil ministry has floated a plan to sell LNG under term agreements with a target selling price of $5/MMBtu, rather than on the spot market, given that spot LNG prices have slumped to lows not seen since 2016.
The JKM benchmark for spot Asian LNG prices has fallen by 50% since the beginning of 2019 from around $8/MMBtu to a little over $4/MMBtu due to a wave of new supply from Australia and the US, and slowing demand growth in China.
As a result, Egypt last autumn canceled a number of sell tenders given the low prices, which were above the breakeven cost of production.
Now, it wants to find buyers willing to sign up for term deals.
Leading LNG analyst David Ledesma from consultancy South-Court told S&P Global Platts on Thursday that the Egyptians could struggle to make the $5/MMBtu price target stick.
"If Egypt is targeting the European market, then an 18-month FOB deal at $5/MMBtu might be quite challenging," Ledesma said, given the current low European gas prices and a bearish outlook.
"And if they are looking to sell into Asia, they will face strong competition from other Asian and Middle Eastern suppliers," he said.
'Awash with gas'
Egypt is now easily able to meet domestic demand, and with imports from Israel having started last week, Egypt will have plenty of gas available for export as LNG.
"Egypt is -- at least currently -- awash with gas and looking for valuable outlets in the context of low spot LNG prices," the IEA's senior gas analyst Jean-Baptiste Dubreuil told S&P Global Platts Thursday.
"This flat price offer for 12-18 month deals could be more particularly interesting for emerging buyers who already submit tenders and use oil indexation," Dubreuil said, though if the $5/MMBtu target does not include shipping, a further $1+/MMBtu for shipping to Asia would have to be added.
Samer Mosis, leading LNG analyst with S&P Global Platts Analytics, said Egypt's new commercial strategy was unlikely to succeed in its current form, with Platts Analytics maintaining its trimmed expectations for Egyptian LNG exports in 2020.
"While this is a movement in the right direction, it fails to surpass Egypt's key hurdle -- that of high breakeven prices amid a 'lower for longer' global gas price environment," Mosis said.
Platts Analytics estimates Egypt's breakeven costs at just under $5/MMBtu.
Mosis said that while Egypt's $5/MMBtu target covers costs, it is higher than what current forward markets indicate is commercially realistic in 2020.
JKM forward prices through the balance of the year average just $4.41/MMBtu, while Platts Analytics forecasts outturn at $3.49/MMBtu, neither enough to make a $5/MMBtu FOB Idku lifting price justifiable.
"Subscribing for a flat $5/MMBtu would mean that some people would be betting on an LNG price recovery," IEA gas analyst Gergely Molnar said on Thursday.
"But the sentiment is bearish, given record high storage stocks in Europe (23 Bcm above the five-year average) and limited demand response in Asia," Molnar said.
Egypt currently has more gas production than it can physically export following the ramp-up of the supergiant Zohr field.
LNG exports from Egypt more than doubled year on year in 2019 to 4.8 Bcm of gas equivalent, according to data from S&P Global Platts Analytics, despite a slowdown in supplies over the autumn due to low prices.
Total exports last year from Egypt's only operational LNG plant -- the 7.2 million mt/year (10 Bcm/year) Shell-operated Idku facility -- increased by 151% compared with the 1.9 Bcm supplied in 2018.
But no cargoes were exported from Idku in September and October saw a sharp drop in supplies, coinciding with a fall in the JKM price to just $4.10/MMBtu in August.
Egypt's overcapacity has been exacerbated by subdued demand both domestically and in Jordan -- its only pipeline export market.
Egyptian gas supplies to Jordan resumed at the end of 2018 after a six-year hiatus, with the export contract reported to be priced at $5/MMBtu.
The IEA's Dubreuil said the pipeline contract could be the "implicit price benchmark" for LNG exports even though the arbitrage potential is practically limited and Jordan is already itself well supplied.
The oversupply in Egypt was worsened also by the start of imports from Israel, which is expected to see supply of some 200 MMcf/d (6 million cu m/d) in the first half of 2020.
To soak up the increased supply, the restart of Egypt's second LNG plant, the 5 million mt/year Damietta facility, would help.
"The planned restarting of Damietta could offset this additional influx from Israel," Dubreuil said.
Damietta -- which is operated by Union Fenosa Gas (UFG), a 50-50 joint venture between Eni and Spain's Naturgy -- has been out of action since 2012 after feedgas to the plant was diverted for use on the domestic market.
An Eni spokesman said last week that negotiations on restarting the plant were ongoing. "We are working with all parties to get Damietta back in operation as soon as possible," the spokesman said.