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Surging Chinese winter LNG demand fuels optimism for US export hopefuls

As gas buyers in China ramp up purchases of LNG to meet winter heating needs, prices for spot cargoes from the Gulf Coast are surging and fueling optimism among U.S. liquefaction project developers trying to clinch long-term contracts to advance their projects.

Record-breaking Chinese LNG imports drove spot LNG prices in Asia to a three-year high of $10.50/MMBtu in mid-December, according to S&P Global Platts. Estimated profit margins for cargoes from Cheniere Energy Inc.'s Sabine Pass reached $4.58/MMBtu on Dec. 14. China is responsible for roughly 40% of growth in global LNG demand since 2016, and a government-led initiative to reduce airborne particulates by more than 15% year-over-year is expected to increase the country's gas consumption even more.

"We are very bullish on China as a customer, and this ... demand increase [is] happening faster than most have anticipated," said Greg Vesey, CEO of LNG Ltd., the Australian company developing the fully permitted Magnolia LNG project in Lake Charles, La., that is awaiting a final investment decision. While he said he does not focus too much on seasonal price spikes, Vesey said recent demand helps "get customers focused."

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While China is credited with this winter's demand boom, the country's buying spree is raising LNG prices for other key markets, too. Platts' Japan/Korea Marker, or JKM, for spot deliveries into Northeast Asia have been climbing since August. Combined, Japan and South Korea represented roughly 40% of global LNG demand in 2016, and both countries saw demand rise in 2017. Despite strong growth, Platts sees demand in Japan and South Korea dropping by about 10% through 2022 as the countries ramp up their reliance on nuclear generation.

Nearly 70% of U.S. LNG went to Asia in October, according to the most recent data from the U.S. Department of Energy. China and South Korea each imported more than 21 Bcf. About 6.7 Bcf went to Japan, and 3.1 Bcf landed in Taiwan.

Dominion Energy Inc.'s Cove Point will soon join Sabine Pass as the second major LNG export terminal in the Lower 48. Along with a fifth liquefaction train at Cheniere's pioneer facility, four LNG export projects are under construction in the U.S. Another four ventures are fully permitted but do not yet have a final investment decision, and roughly a dozen others are seeking approval from the Federal Energy Regulatory Commission.

Which projects move forward will depend on a developer's ability to nail down long-term contracts with buyers. With ample supply on the market, final investment decisions have slowed as buyers opt to take their chances on the spot market instead of tying themselves to a 20-year deal.

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That gets riskier when prices shoot to $10/MMBtu during peak demand times, said Height Securities analyst Katie Bays. "If you were somewhat comfortable being short in the winter because you can go into the spot market and pick up a few cargoes here and there, you're now saying 'that's not going to work.'"

Recent prices show that the market is tighter than expected, incentivizing new capacity, she said.

"Markets get tight in the winter, but what's remarkable is it's tight and you've got supply coming online from Australia, Yamal LNG, Sabine Pass, Cove Point," she said. "Six months of the year where U.S. Gulf Coast projects can earn a $4 margin — that is a very economic environment for new capacity."

LNG developers often point to the early 2020s when pitching multibillion-dollar export plans to potential buyers. That is when, they say, the market will enter a period of undersupply and buyers will be forced to pay a hefty sum for the limited capacity available.

"There was an 18-month period where the growth in demand was questionable, but we're back," Charif Souki, who co-founded LNG export developer Tellurian Inc. after serving as the CEO of Cheniere, said in an interview. "Now supply is not keeping up with demand, and this is going to become very apparent very quickly. It's already clear. Now, maybe it's not there for 12 months of the year, but it's there for the winter. Then we'll see in spring how the market shapes up."

Ross Wyeno is an analyst for S&P Global Platts, which like S&P Global Market Intelligence, is owned by S&P Global Inc.