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Wave of LNG cargo cancellations to start as soon as June, shipbroker projects

U.S. LNG suppliers could see 20 to 25 cargoes canceled in June, kicking off a wave of cancellations that will last through October as the combined global health and economic crisis of the coronavirus pandemic hammers world natural gas demand, shipbroker Poten & Partners said in an outlook.

That level of curtailments could push around 2 million tonnes of LNG back onto the domestic market compared to a previous forecast, Poten & Partners said in an April 22 webinar.

Significant uncertainty remains about the ability of the domestic U.S. gas market to absorb a wave of LNG cargo cancellations, which the shipbroker expected to become most pronounced in October as already-high storage inventories start to fill up in Europe. Europe has served as a key outlet in absorbing the flood of new LNG supplies over the past year. Poten & Partners forecast U.S. LNG exports in October will be less than half of what they were in January, when feedgas deliveries to the six major LNG terminals in operation ended the month at about 9.3 Bcf/d, according to pipeline flow data from S&P Global Market Intelligence.

"The U.S. economics have been hit really hard, so we expect the U.S. supply to be hit really hard," Poten & Partners LNG forecasting manager Kristen Holmquist said on the webinar. "And we are already starting to see that."

The pandemic created an unprecedented demand shock for the world LNG industry, which was already reeling from a supply glut and weaker-than-expected demand in a relatively mild winter before the spread of the virus. The duration and severity of the crisis are unclear, as is the ultimate level of demand destruction. Poten & Partners projected global LNG demand to decline by about 11 million tonnes year-over-year from 2019.

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U.S. LNG supplies will be most vulnerable to cancellations because they have greater offtake flexibility by design than other world supplies and because prices are at historic lows. The forecast by Poten & Partners came as turmoil in global crude markets has eroded the competitiveness of U.S. LNG against LNG indexed to Brent oil prices, which makes up much of the world supply outside the U.S. The returns for selling a spot U.S. LNG cargo to a buyer in Europe or Asia are expected to remain negative through the end of the year, S&P Global Platts Analytics said in a recent outlook.

Feedgas deliveries to U.S. LNG terminals have shown little evidence of the turmoil in global gas markets. Dips in recent weeks were associated with other factors, such as maintenance work and late-stage commissioning activities on new liquefaction trains.

U.S. LNG companies themselves have significant financial protection against gas price volatility and potential cargo cancellations. The majority of U.S. LNG supply is tied to long-term take-or-pay contracts that guarantee the producers a fixed liquefaction fee, the lion's share of their cash flow, even if customers cancel cargoes, as two of Cheniere Energy Inc.'s customers did with cargoes for April loading.

Many off-takers consider liquefaction fees and shipping fees as sunk costs, especially as a tighter market has made it difficult to find alternate uses for a contracted vessel. Even if off-takers pay to cancel a contracted U.S. cargo, they can still pay less for spot volumes linked to other price benchmarks, Poten & Partners said.

The traditional model in the U.S. charges buyers 115% of the Henry Hub price plus a liquefaction fee of around $3/MMBtu. That has been disadvantaged relative to price benchmarks in Northeast Asia and Northwest Europe since January, and especially since oil prices began collapsing in March, Poten & Partners said. The economics of delivering a spot cargo of U.S. LNG to Asia have become slightly more favorable than exports to Europe.

Even after the anticipated curtailments of U.S. LNG exports, a global supply surplus of about 6 million tonnes could remain, Poten & Partners predicted.

"The message is that additional adjustments may be required from more traditional suppliers that don't have the flexibility that U.S. suppliers have," Holmquist said. "We are not in this forecast saying who we think that is going to happen to, because this is really unprecedented, and it's not clear who or by what mechanism these volumes might come out."

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.