A halting restart to LNG production at Freeport LNG has lifted basis prices in the East Texas gas market this month as the terminal's rocky return to full commercial service keeps US and global gas markets on edge.
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In March, gas deliveries to the Quintana Island liquefaction plant have averaged just over 1 Bcf/d. But flows to the terminal have swung significantly, ranging from as high as nearly 1.7 Bcf/d on March 5 to as low as about 220 MMcf/d on March 7, data from S&P Global Commodity Insights shows. Freeport was on track to receive more than 1.4 Bcf/d of feedgas on March 24 after topping 1 Bcf/d for the previous three days, based on evening cycle nomination data that could later be revised.
The return of Freeport from an eight-month-long outage has helped lift overall US LNG feedgas deliveries, which are now on pace for a new monthly average high of nearly 13.1 Bcf/d through March 24 – a figure that's on track to top the historical monthly record of 12.8 Bcf/d set in March 2022. Market participants are watching the ramp-up of operations at Freeport as a factor that could bolster languishing Gulf Coast gas prices as it tightens regional market fundamentals.
On the NYMEX, the US gas futures market has so far largely shrugged off the restart of feedgas demand at Freeport. In recent trading, the Henry Hub prompt-month contract has dipped as low as $2.13/MMBtu as traders zero-in on the expected supply impact from a now massive US storage surplus.
In the East Texas gas market, though, additional feedgas demand from Freeport has undoubtedly tightened the supply-demand balance there. At Houston Ship Channel, cash prices have strengthened to an average 24 cents discount to Henry Hub this month – up from a 42 cents discount in February and 67 cents discount in January, Platts data shows.
During the extended outage at Freeport, basis prices at Houston Ship Channel and Katy Hub experienced wild swings, trading on more than several occasions at discounts of $2/MMBtu or more to Henry Hub. In the months prior to the terminal's shutdown, basis prices at the two East Texas hubs only averaged about 25 cents discount to the US benchmark.
At the same time, the effort at Freeport LNG to return to full service appears to be "skewing pipeline samples out of the Haynesville shale and creating a distorted view of natural gas supply trends," East Daley Analytics said in a recent research note.
East Daley cited pipeline flows in East Texas and northern Louisiana that appeared to trail off at the end of February from an all-time high, prompting speculation that Haynesville producers could be shutting in wells in response to lower gas prices. Instead, the analysts said they believe gas at the Carthage hub, a key trading point for Haynesville supply, was being redirected south on to intrastate pipelines to meet Freeport LNG feedgas demand, rather than being shipped east to northeastern Louisiana.
On Feb. 21, US regulators gave Freeport LNG a greenlight to resume production at its first two trains, followed just over two-weeks later by an authorization March 8 to begin operating its third train.
Based on earlier restart projections from Freeport, many traders may have assumed that a regulatory go-ahead would have been followed by a quick ramp-up in feedgas flows to Freeport – back to pre-outage levels of around 2 Bcf/d.
Last month, forward basis markets at Houston Ship Channel appeared to foresee that outcome. In mid-February, the East Texas hub's April and May forward contracts both strengthened to about 20 cents behind the corresponding Henry Hub forward price. As of late March, though, the forward market spread has widened with April and May now trading about 32 cents behind Henry Hub as the market takes stock of the stumbling restart at Freeport.
Four cargoes from Freeport LNG were heard to be cancelled in March as the operator experienced valve issues on Train 1 and electrical issues on Train 2, according to market sources. Freeport declined to comment March 24.
Globally, the resumption of LNG production at Freeport is expected to be the single-largest supply addition to the international LNG market in 2023. Ramping operations underway at the facility will also help determine the overall strength of US LNG feedgas demand exiting winter. The spring shoulder season is often when US facilities take liquefaction units offline for seasonal maintenance – potentially compounding the market impact of continued weakness in feedgas demand at Freeport.
S&P Global forecasts US LNG feedgas demand will average 13.4 Bcf/d in 2023, up from 11.8 Bcf/d last year. The forecast sees LNG feedgas rising headed into winter 2023-24, peaking at 14 Bcf/d in November.