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US LNG exports to be loss-making with '100% probability': Gazprom

Highlights

* Russian giant dismisses certain 'sunk cost' logic
* Henry Hub price could 'sky-rocket': Nemov
* Accepts US will be 'cornerstone' of global LNG market

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US LNG exports will be a loss-making enterprise at some point in the next 20 years "with 100% probability", a leading official at Russian gas giant Gazprom said this week, as the monopoly continues to hit out at the prospect of US LNG competing with Russian gas in Europe.

Valery Nemov, deputy head of contract structuring and price formation at Gazprom Export, also warned that US Henry Hub prices could soar in the future, rendering US LNG exports even less profitable.

Nemov, writing in Gazprom's monthly newsletter published Thursday, said: "We can assume that a scenario when the market is short, prices in the US are at similar levels to those in Europe or Asia, and thus LNG exports from the US would be loss-making, is likely to happen in the next 20 years with 100% probability."

Article Continues below...

Nemov also made the case that tolling fees for liquefaction at US LNG plants should not be considered "sunk costs" and that the economics of US LNG look considerably worse as a result.

Many of the contracts signed by buyers of future US LNG include a tolling fee which the buyer pays to cover the cost of liquefaction.

These currently equal $2.37-$3/MMBtu ($85-125/1,000 cu m) and under certain contracts must be paid regardless of whether buyers take delivery or not.

"We would say that investments into liquefaction plants are 'sunk costs', but tolling fees are not," Nemov said.

"The 'sunk costs' logic would only work if contracts are revised so as to exclude a 'liquefy-or-pay' condition and to stipulate buying liquefaction capacities on spot. In that case, money would be permanently lost for those who have invested in liquefaction," he said.

Nemov said Gazprom did not exclude this scenario. "We know better than others that there are no buyers in the market that are ready to incur losses for decades," he said.

He added: "A typical buyer is not obliged to take US LNG if it does not make economic sense, but they have to pay fixed tolling fees to capacity holders regardless of whether buyers takes delivery or not. Thus liquefaction projects are hedged of any risks, while LNG off-takers may face difficulties trying to sell it to consumers."

VARIABLE FEEDSTOCK COST

Nemov added that the feed gas for US LNG was a "variable value."

"It currently amounts to around $2/MMBtu, but can easily go several times higher when the US gas supply and demand balance alters," he said.

"Taking into account the fact that signed contracts have a duration of 20 years, we should not rule it out that the price can skyrocket at some point, as it has happened in the past, and remain at high levels for months if not years."

He said under current market conditions, some 31 million mt/year of US LNG is theoretically available to be delivered to the European market by 2020.

This is calculated by adding those volumes already with a determined destination in Europe or multiple global destinations that in practice mean volumes that would go to more commercially attractive markets.

But, he said, "making any projections [on] how much LNG from the US will come to Europe in 2017 or 2020 is a [thankless] task."

"We assume that there will definitely be at least some volumes, but too many mismatches make forecasting difficult."

Despite Gazprom's pessimistic view of the prospects for US LNG, Nemov did say US LNG would have an important role to play on global LNG markets.

"What cannot be denied is that with the number of both liquefaction and regasification facilities being developed, the US is becoming a cornerstone in the global supply and demand of LNG," he said.

--Stuart Elliott, stuart.elliott@spglobal.com
--Edited by Jeremy Lovell, jeremy.lovell@spglobal.com