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Message to LNG producers: shut in or find new markets

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Supply glut, weaker-than-expected demand weigh on prices

Latin America could be alternative home to Europe for cargoes

Houston — LNG producers were encouraged Friday to shut in some supply amid the global glut that is helping drive down prices in Asia, or push more volumes to markets beyond Europe, perhaps Latin America.

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The takeaway from the final day of the 19th annual S&P Global Platts LNG Conference in Houston was that something has to give, and soon, to allow for more liquefaction projects to be built in time to fill a projected supply shortage around the middle of the decade.

Qatari expansions and additional units coming online in the US that were sanctioned years ago, in addition to supplies coming from Australia and other exporting countries, are pumping more LNG into traditional end-use markets than those markets can handle. Prices have cratered in recent months. Weaker-than-expected demand, relatively mild winter weather, the coronavirus outbreak and Chinese tariffs have made the situation worse.

"The global market needs to balance [things out] by turning off supply. It's got to get somebody to do that. It has not done that in a significant size," Andrew Helm, a senior LNG trader at British utility Centrica, told the conference. "The Asian Basin is essentially telling the Atlantic Basin, 'Whatever you do, please don't send us any cargoes for the winter.'"

In the US, currently the world's biggest growth market for liquefaction capacity, utilization at the six major export terminals has remained robust despite the challenging market environment, although feedgas deliveries have dropped more than 1.5 Bcf/d from recent record levels, driven in part by maintenance that Cheniere Energy and Sempra Energy were conducting at their Louisiana facilities.

SECOND WAVE

The challenges have been more significant for the next wave of US suppliers. Most of the dozen or so developers of new terminals targeted to start up around the mid-2020s have struggled to secure sufficient long-term contracts with offtakers to finance construction. Some have delayed final investment decisions.

One of those developers that has yet to take FID, NextDecade, said late Thursday it had agreed to let Canada's Enbridge take over construction, ownership and operation of its proposed up to 4.5 Bcf/d Rio Bravo Pipeline, which would supply feedgas to its proposed Rio Grande LNG export terminal in Brownsville, Texas. In a statement, CEO Matt Schatzman said the sale of the project, for $25 million, furthers the developer's efforts to deliver the LNG terminal on time and on budget.

If the pipeline and LNG terminal are ultimately built, NextDecade will retain the firm transportation capacity on the pipeline for at least 20 years, according to the terms of the agreement it negotiated with Enbridge.

While Europe has helped balance the market by taking increased volumes of LNG, and it has the regasification capacity to handle even more supplies, there are constraints on sendout from those facilities.

"Effectively, there are just more cargoes looking for homes than there are slots at times," Helm said.

MEXICO TO BRAZIL

Latin America, with its close proximity to US Gulf Coast liquefaction terminals, could be an option for more cargoes, although there are limitations there too.

Brazil, Colombia and Mexico provide some opportunities for LNG suppliers, while Argentinian import demand is expected to slide, said Majed Limam, manager, LNG Americas, at Poten & Partners.

"So, if you're a supplier looking to Argentina, that's not going to be a growth driver," Limam said. "Brazil is a different story here."

With domestic production on the decline in Brazil, pipeline bottlenecks and the country moving away from being a pure seasonal play, more LNG cargoes could find a home there, he said.

"Brazil we think has potential to sustain its requirements and perhaps increase a bit further," Limam said.

In Mexico, which is heavily dependent on US gas, there are opportunities to import more LNG on the west coast of the country, he said. Increasing flows of US pipeline gas to Mexico, however, could limit the upside for LNG exporters, Limam said.

Added Helm: "If all else is equal, you have to go and shut off somebody."