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Rising shipping rate, weak demand to favor Yamal LNG supply into Europe this winter: Morten Frisch

London — A tight shipping market associated with weak LNG demand in Asia could support Russian Yamal LNG supply into Europeover the US this winter, Morten Frisch, senior partner at Morten Frisch Consulting, told S&P Global Platts.

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Market participants with regasification capacity in Europe could be encouraged to trade available cargoes within their trading gas basin, rather than bringing LNG from the other side of the Atlantic.

JKM premium to TTF for Q4 delivery was assessed at $0.429/MMBtu on average over the period of August 1-15, narrowing from an average of $0.59/MMBtu last month. This also compares with a premium of $3.53/MMBtu last year on August 1-15.

At the same time, Platts data show shipping rates have been rising in the last four months, with the Atlantic carrier rate assessed at $68,000/day on Monday, from $35,000/day at the beginning of April.

TIGHTENING SHIPPING MARKET

"LNG traders are now buying LNG cargoes and putting these into floating storage and 'slow steaming' laden LNGCs. LNGC charter rates are as a result going up," Frisch said.

LNG cargo deliveries have been slowed or deferred recently, as participants have been seeking to lock into contango using LNG tanks, LNGCs as floating storage and regasification units for storage.

The JKM derivative price for October delivery was assessed at a $0.95/MMBtu discount to November and at a $1.7/MMBtu discount to December, Platts data showed on Monday.

In addition, new LNG production entering the market has limited slots availability at import terminals, in turn supporting use of LNG storage and also resulting in LGGCs queuing to enter terminals, he said.

Platts Analytics expects spot shipping rates to rise along seasonal trends, to reach $80,000/day in October, it said in a report published on August 16.

NEW US LNG PRODUCTION CHALLENGED

"LNGC charter rates and availability of LNGCs could be the 'tipping point', especially in case of mild weather in both Europe and North Asia this winter, as it would turn LNG prices into a downward spiral," Frisch said.

"Yamal LNG, Qatar Gas, Nigeria LNG etc. all have more robust economics than the new US projects and also their ownLNGC fleets."

"Adding to the pressure, underground stock levels in Europe are currently 80% and more full," he said.

Platts Analytics forecasts European gas storage levels to reach 98% of capacity at the end of September, the end of the current gas contract year.

"There is a possibility that US LNG plant capacity to be turned down this coming winter even with US Henry Hub price at $2.50/MMBtu and even lower prices probably below $1.50/MMBtu at Waha hub in the Permian," he said.

This is particularly likely with new US capacity projects set to come online by the end of the year, as most of them have a different commercial model to the one used by the US's leading LNG supplier Cheniere at Sabine Pass LNG Terminal and Corpus Christi LNG, he said.

Cheniere projects are selling LNG on a FOB basis with the pricing formula: liquefaction fee, plus feedgas and plant fuel at Henry Hub x 115%.

"For the non-Cheniere projects the buyer of the LNG liquefaction capacity is himself responsible for sourcing feedgas and fuel for the liquefaction capacity bought."

All the LNG trains -- including Cheniere's -- coming online this year are based on "liquefaction or pay" contracts, with the liquefaction fee typically representing more than $3.00/MMBtu, he pointed out.

The difference in the fee -- should the buyer of the liquefaction capacity chose not to use it -- is the feedgas cost based on nearby supply hub.

"As a result the buyer of LNG FOB from Cheniere has a larger sunk cost than a party only buying a liquefaction capacity from the plant owner. The latter party is free to sell his feed gas supply in the market when electing not to use the liquefaction capacity, something the buyer of LNG from Cheniere cannot do."

"If LNG prices should soften due to oversupply this winter while LNGC charter rates remain high, owners of such high priced LNG liquefaction capacity might elect to sell their gas supply in the US market and sub-charter their LNGCs,and just 'swallow as sunk cost the reduced liquefaction fee he has to pay to the owner of the LNG liquefaction plant for not using his contracted capacity," he concluded.

US LNG projects expected in service date

Project name Operator Official starting date Platts Analytics expected starting date Status Nameplate capacity (Bcf/d)
Freeport LNG T1 Freeport LNG Nov-18 Sep-19 Under construction 0.67
Freeport LNG T2 Freeport LNG Apr-19 Jan-20 Under construction 0.67
Freeport LNG T3 Freeport LNG Oct-19 May-20 Under construction 0.67
Cameron LNG T1 Sempra Feb-19 Jul-19 Operating 0.6
Cameron LNG T2 Sempra Jun-19 Mar-20 Under construction 0.6
Cameron LNG T3 Sempra Dec-19 Aug-20 Under construction 0.6
Cove Point T1 Dominion Energy Nov-17 Mar-18 Operating 0.7
Corpus Christi T1 Cheniere Feb-19 Mar-19 Operating 0.6
Corpus Christi T2 Cheniere Aug-19 Aug-19 Under construction 0.6
Corpus Christi T3 Cheniere Jul-20 Dec-21 Under construction 0.6
Elba Island T1-6 Kinder Morgan Jun-18 Aug-19 Under construction 0.2
Elba Island T7-10 Kinder Morgan Feb-18 Feb-20 Under construction 0.13

Source: Platts Analytics

"In the current very volatile and therefore uncertain energy market, it is important all parties being engaged in LNG activities base all their commercial decisions on their own detailed energy market and price analyses," Morten Frisch stated.

-- Lucie Roux, lucie.roux@spglobal.com

-- Edited by Alisdair Bowles, alisdair.bowles@spglobal.com