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Last week, Spanish utility Naturgy Energy Group cancelled two LNG cargoes set to be delivered to Spain from the US Gulf Coast through Cheniere Energy. Scheduled to be loaded at the Texas Corpus Christi facility, Naturgy cancelled the cargoes by exercising its option not to lift under its 20-year contract with Cheniere, as its Spanish clients Repsol and Endesa forgo-ed the fuel. If this was an isolated incident, it could be ignored. But it isn’t. At least half a dozen buyers are reportedly considering cancelling cargoes from the US, including two Japanese powerhouses. It is not that the LNG isn’t required, though a mild winter in Northeast Asia did sap spot demand – it is simply that there is too much LNG sloshing around the world currently.
Consider this. In 2017, global LNG capacity was some 290 million tons per annum. In 2019, this had risen to some 393 million tons, a startling jump over two years, as the last few LNG megaprojects in Australia and the first few US Gulf LNG projects started up. And it will only go up. Based on approvals in 2019, global LNG liquefaction capacity could grow to 843 million tons per annum by the mid-2020s, propelled by additional volumes from the US, Russia, Papua New Guinea, the Eastern Mediterranean and West Africa. That’s a lot of capacity. Not all of it will make it past the planning stage and certainly not the 250 mtpa planned in the US but enough it will. And for a while, there was a lot of demand. But in a classic case of ‘if we build it, they will buy it’, supply has outstripped demand. And therein lies the problem.
The gap between LNG supply and demand has driven prices to record lows. US prices are currently at some US$2.60 per mmBtu for spot cargoes, margins so low that it may not even be profitable to sell cargoes to Europe. Part of this is due to the shale revolution, which created so much gas that it drove Henry Hub gas prices to a major discount against other natural gas benchmarks. But the US has to export its natural gas, because there is nowhere else for it to go. Europe itself isn’t in a position to take more, as stockpiles are brimming. In Asia, severe winters usually spike demand for spot cargoes, but two consecutive mild winters have created a glut.
Add to this the Covid-19 coronavirus situation. China has already declared force majeure on receiving some cargoes of LNG (though this was rejected by Shell and Total), turning an already weak year into a bloodbath. It has always been taken that China would be the LNG market’s great hope; and indeed, many US Gulf LNG exporters have been rushing to sign agreements with Chinese importers. But Donald Trump’s trade war has dried that trade up, and even with a Phase 1 trade deal, China is not in a position to ramp up at all.
Despite all the (short term) gloom, the long term prognosis for LNG demand remains slightly healthier. Shell, which became the world’s largest LNG trader with its purchase of the BG Group, is predicting that global LNG trade will double by 2040, as ‘policy meets reality’ for countries aiming to move to cleaner energy from coal switching in Europe to growing populations in China. LNG demand as of 2019 was an estimated 360 million tons, having grown 12.5% y-o-y. If that projection holds through, it will still be a situation of oversupply but one that should be manageable. But even Shell, as positive as it is only expects the situation to improve in the mid-2020s, as a ‘combination of continued demand growth and reduction in new supply coming on-stream’ changes the market yet again.
With eroding demand and ample supply, LNG is in a painful place right now. Too much supply has entered the market at a time when demand is taking a hit; with more supply on the way, it will be a painful adjustment period for the industry. But LNG is a long game. And the future looks to be brighter, as long as players can get through the current huge hump in the road ahead.
Global LNG benchmark prices:
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