Exporters of U.S. LNG in 2019 relied increasingly on Europe to absorb a flood of new natural gas supply, but there is growing skepticism among market observers that the European market can continue to provide the same level of relief this year.
If Europe cannot, one of the few bright spots for the U.S. gas market could dim.
Experts are warning that exporters may have to curtail LNG production. LNG prices have collapsed as rising supplies, especially in the U.S., met weaker-than-expected demand in a mild winter. On top of that, the coronavirus outbreak has crippled industrial demand for gas in China, which is supposed to be the world's fastest-growing importer of LNG.
Recent figures from the U.S. Department of Energy underscored the dependence of U.S.-based exporters on European markets last year.
In 2019, the combined Europe and Central Asia region, which includes Turkey, took about 40% of LNG cargoes exported from the U.S., while about 30% of cargoes went to the East Asia and Pacific region, which includes major end-users like Japan and South Korea, according to an analysis of monthly DOE export figures released Feb. 18. The top destinations in Europe for U.S. cargoes were the U.K., Spain and France.
Many of the purchases were concentrated in the second half of 2019, as prices weakened and trade tensions between the U.S. and China continued. In the fourth quarter of 2019, about 53% of U.S. cargoes went to Europe, while the East Asia and Pacific region accounted for about 32%. The U.K. received about 95.9 Bcf worth of U.S. LNG during the fourth quarter, which was the majority of the approximately 120.6 Bcf that the U.K. imported from the U.S. in all of 2019.
Europe will likely remain the preferred market for spot cargoes of U.S. LNG because the economics of shipping cargoes there are more favorable than the economics related to Asia, Norwegian energy analytics firm Rystad Energy said in an outlook for 2020 on Feb. 13. But there is less room for LNG supplies in Europe in 2020 in the face of high gas storage levels and competition with cheaper pipeline gas.
"We see that during the summer, given that the spread is negative for both European and Asian prices, exporters of U.S. LNG spot cargoes would not be covering their operational costs when exporting to either Europe or Asia," Carlos Torres Diaz, the head of gas and power markets at Rystad, said.
The consultancy saw European prices improving enough for the winter of 2021 for U.S. LNG exporters to cover their marginal costs, but it predicted that would happen later in the year for prices in Asia.
As it stands, the Platts Japan Korea Marker, the benchmark price for spot-traded LNG in Northeast Asia, is below $3/MMBtu, a level that does not support shipments of spot cargoes from the U.S.
Reports that the Spanish utility Naturgy Energy Group SA had canceled an April-loading cargo from Cheniere Energy Inc. dealt another blow to the U.S. domestic market. Analysts said the impact on Cheniere from canceled cargoes would be limited, because the company's long-term contracts still guarantee the producer will collect a fixed tolling fee if an off-taker decides not to lift a cargo.
But the development "could be a menacing omen for the U.S. gas space," analysts at the energy investment bank Tudor Pickering Holt & Co. said Feb. 21. Analysts questioned whether the event was a one-off event or the first of many cancellations.
Countries in Asia remained major buyers of U.S. LNG in 2019. South Korea brought in the most U.S. LNG of any country that year, a total of about 266.1 Bcf. South Korea is the top overall buyer of U.S. LNG dating back to the first shipment from the Lower 48 in February 2016. Another top buyer, Japan, brought in about 200.8 Bcf during the year. But increasing amounts of electricity generation from nuclear power in South Korea and Japan has dented growth for gas there.
No U.S. LNG cargoes have been delivered to China in nearly a year, but the "phase one" trade agreement signed by the U.S. and China on Jan. 15 spurred optimism over the potential for renewed flows. China's 25% retaliatory tariff on U.S. LNG remains in place, but China said Feb. 18 it would start accepting applications for tariff exemptions on goods that include LNG, but Chinese refiners and traders said it would take time for purchases to begin because of the coronavirus.
The tariff exemptions make it more likely that U.S. LNG cargoes ship to China in 2020, but the tariffs are still a significant hurdle for exporters and the exemptions do not overcome low prices, Morningstar Inc.'s director of oil and products research Sandy Fielden said Feb. 19.
"In the case of LNG, the market is clearly oversupplied, and pricing puts the arbitrage underwater from the U.S. Gulf to Asia at the moment," Fielden said. "That would suggest Chinese buying would need to be proactive and priced above today's market to encourage flows."
S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.