US Ready to Export its First LNG Cargo

US Ready to Export its First LNG Cargo

The US is about to export its first cargo of liquefied natural gas (LNG) from the Lower 48 states. The LNG tanker, Asia Vision, which docked at Sabine Pass a few days ago, is reportedly shipping out imminently, likely within the next day.

After technical issues at the Sabine Pass facility caused Cheniere to delay the upstart of the facility in early January, the first shipments of US LNG may now be only a day away.

The LNG tanker Asia Vision, which looks likely to have been contracted by Cheniere for some time, docked at Sabine Pass a few days ago after loitering off the shore since the beginning of the month.

According to Citi Research, it looks like the cargo will leave within the next day, possibly going to Brazil bought by Petrobras. Although Brazil may not need the cargo, Brazil could be optimizing its own LNG shipments, so that it can take the US cargo and divert other ones.

Impact As Assessed by Citi Research in its Report

While the short-term impact on North American and global natural gas prices would be minimal, the medium- and long-term impacts are sizeable.

Sabine Pass’ intake of about 0.5-Bcf/d of gas is only about 0.5% of current US demand, but once LNG exports begin and start to ramp up, the US would become a net exporter of LNG, as LNG exports from the Lower 48 states more than offset LNG imports in New England, the only place in the US that needs LNG more often

The medium term impact in the coming year or two is sizeable, threatening even Russian gas’ minimum delivered cost to the German Border. As discussed in a prior Citi report, US gas could reach Europe and be competitive with NBP gas.

The medium-term impact on European and Asian LNG pricing could be dramatic. If US prices were to stay at ~$1.8/MMBtu, variable delivered cost into Europe could be only $2.7/MMBtu, threatening even Russian pipeline export economics. If Europe can’t absorb the influx, Asian prices could collapse to European prices in order to shut down US exports.

In all, the short term impact should be limited because the export volume is still so small, but the medium to long-term effects would be more transformative in changing the pricing. A pricing revolution may indeed be unfolding already.

Source : Citi Research

At a Henry Hub gas price of $2.5/MMBtu, as Citi expects 2Q’16 prices to be, the delivered cost of US LNG into Europe would be ~$3.5/MMBtu after regasification, lower than NBP’s forward price at $4.0 in the 2Q and 3Q’16 timeframe.

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If US gas prices were to stay at current prices around $1.8/MMBtu, then the delivered cost into Europe could fall to $2.7/MMBtu. This is competitive with the supposed minimum price in the high-$2 (or possibly ~$2.75) for Russian gas. If part of the LNG tanker day rate is sunk, then US LNG delivered costs could fall to $2.5!

Asian pricing should also be pressured lower. We estimate delivered costs of US exports into Asia would be around $3.8/MMBtu through 2016 and ~$4.3/MMBtu in 2017 (based on Citi’s US natural gas and Brent oil price forecasts).

If oil-indexed LNG prices were to follow the current oil forward curves, then the delivered cost of US LNG, without factoring in the liquefaction capacity charge, would still be $1.4 under the oil-indexed LNG price.

Price pressure in Asia may be exacerbated if Europe is unable to act as a “dumping ground” for excess LNG, which could happen particularly if Russia adopts a market share strategy and pushes increased volumes into Europe Then Asian LNG prices may need to collapse to European pricing in order to shut-down LNG exports

Longer term, besides pressuring prices lower in Europe and Asia, the advent of US LNG exports is set to transform the landscape of long-term contracts in global LNG markets. Growing oversupply will increasingly force sellers to offer more flexible contract terms as buyers gain market power.

Meanwhile, the absence of destination restrictions on US LNG exports means these cargoes are free to be delivered to whichever markets are profitable, threatening traditional LNG suppliers.

(1). New LNG liquefaction capacity, including those from the US, is starting up just as demand growth is moderating, creating more pressure to lower prices and loosen contract terms, particularly on destination restrictions. This is a turnaround from developments in the last decade, when it was sellers, with low long-term contracted prices, who wanted to renegotiate when short-term prices were surging and new deals were completed at higher prices.

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Now, it is the buyers that have the upper hand and with the competition of flexible US exports to contend with, traditional sellers will need to offer increasingly more favorable terms in order attract or retain buyers. Increased competition from US LNG exports should also expedite the development of LNG spot markets.

Market power on the exports side was one of the key reasons for why a spot market failed to flourish, but it looks to be changing. Shell and BG combined could have equity stakes in one-fifth of the global LNG supply. With the inclusion of Qatar, market concentration (and market power) should rise.

(2). The restricted capacity of the expanded Panama Canal could also foster the development of spot LNG trading. The Panama Canal expansion would only allow six additional vessels to pass through in each direction per day. This might mean one or two LNG cargoes originating from the Atlantic Basin could get to Asia. This limitation and the heat content of gas, as US LNG is super lean but many Asian regas terminals process rich gas, have generated more interests in swap deals.

These swap deals would involve keeping US LNG cargoes, originally destined for Asia, in the Atlantic basin for cargoes in the Pacific basin or East of Suez.

Assuming that 1 to 2 standard US LNG cargoes (or ~2.5 to 5-Bcf/d) were to pass the Panama Canal, then between 3 to 5.5-Bcf/d of US LNG could stay in the Atlantic basin, assuming over the long run that the US has the capacity to export 8-Bcf/d or more of LNG. These swap deals and excess cargoes are ones that would help increase interest in LNG spot trading.

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Citi Research noted that these developments are calling into question the viability of long-term contracts in their current forms. Oil-indexation and destination restrictions do not reflect market fundamentals. Increased options in the market and low spot prices are adding pressure to transform contracts to reflect short-term fundamentals, with volume and destination flexibility (including the reselling and diversion of LNG cargoes).

Indeed, Qatar and India recently announced a renegotiation of their long-term contract, which was priced based off of a three-month trailing Brent average versus the previous sixty-month trailing average.

For others, the success of renegotiation could hinge on the existing relationship between current buyers and sellers locked in contracts, whether there are reopener provisions, and the sellers’ financial and operational flexibility.

Legally, clauses on price renegotiation may require parties to show that market conditions have changed not temporarily but permanently, so that pricing would have to change to reflect new market conditions. But all in, the availability of US LNG exports significantly increases the leverage of LNG buyers.

(Disclosure: This report is based out of a report done by Citi Research Team)