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Forward spreads point to further upside for early startup of new US LNG capacity

Highlights

Sabine Pass Train 6, Calcasieu Pass ahead of schedule

Virus-battered market has rebounded over the last year

As the market dislocation from the coronavirus pandemic was raging, the S&P Global Platts JKM, the benchmark price for spot LNG delivered to Northeast Asia, settled April 28, 2020, at $1.825/MMBtu, its lowest on record.

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LNG buyers started cancelling US cargoes -- more than 175 before the wave abated.

Inside the biggest US LNG exporter, Cheniere Energy, officials were busy reassuring investors about the sanctity of the company's long-term contracts. At Venture Global LNG's Calcasieu Pass, engineers had just raised the roof of the first LNG storage tank.

Fast-forward 13 months and the global market is booming, thanks to strong demand spurred by economic recovery. The JKM is trading above $10/MMBtu, 5 ½ times what it was at is low. And, instead of talking about turning off existing supply or slowing construction, Cheniere and Venture Global are talking about turning on new capacity.

The latest forward price spreads between the US Henry Hub and end-user markets in Europe and Asia provide additional incentive for Calcasieu Pass and the sixth liquefaction train at Cheniere's Sabine Pass – both in Louisiana -- to start up early.

Platts Analytics data point to the spread between the Dutch TTF and the Henry Hub being about $5.75/MMBtu and the JKM-Henry Hub spread being about $7.30//MMBtu at the start of the fall. Those spreads are trending even wider heading through the end of the year and into 2022, the data show.

"Beyond this year, we continue to see a multiyear recovery in the global LNG market and upside to out-year forwards," Morgan Stanley said in a note to clients May 16.

With those dynamics expected to translate into strong netbacks, existing US LNG exporters will want to keep their terminals at or near full utilization, to produce as much LNG as possible.

Some appear to have already put off or shortened maintenance plans during what is traditionally considered shoulder season. Feedgas deliveries to US LNG terminals totaled 11 Bcf/d on May 24, implying utilization of over 90%.

The sweet spot is just as encouraging for new US supplies, especially considering delays and disruptions experienced by some overseas LNG terminals and projects, such as Total-operated Mozambique LNG.

Venture Global said in March that it plans a phased operational start-up that, with the requisite review and approvals from US regulators, could include the first exports of LNG from Calcasieu Pass in late 2021 . That would be about a year earlier than originally anticipated. A spokeswoman did not respond to a request for a startup update May 24.

Earlier in May, Cheniere CEO Jack Fusco said during an investor call that, barring significant weather disruptions including from upcoming hurricane season, the company expects Train 6 at Sabine Pass to begin producing LNG and commissioning before the end of the year.

That timing, too, would be about a year early. In its first quarterly report issued after sanctioning construction of the train in June 2019, Cheniere estimated substantial completion in the first half of 2023. It most recently said it expects substantial completion in the first half of 2022. A spokeswoman reiterated that timing May 24, adding that should Train 6 be producing LNG by year-end that "ideally positions" Cheniere to benefit from the forward spreads.

Commercial terms

Once Calcasieu Pass and Sabine Pass Train 6 enter commercial service, long-term supply contracts with buyers that are tied to the facilities will kick in.

Cheniere has said offtake deals with Malaysia 's Petronas and commodity trader Vitol will be used to support Train 6.

Venture Global has long-term contracts to support Calcasieu Pass with Royal Dutch Shell, Italy's Edison , Portugal 's Galp, Britain's BP, Spain's Repsol and Poland's PGNiG. Venture Global has sold 8 million mt/year of Calcasieu Pass' total 10 million mt/year of offtake under long-term agreements. It has said it expects that it will contract the remaining 2 million mt/year of capacity before the completion of construction.

Until the commercial contracts go into effect, commissioning cargoes from Sabine Pass Train 6 and Calcasieu Pass would likely be sold in the open market, on a spot basis, through tenders, or through short-term deals.