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Pressure on US LNG as Asian Market Fundamentals Grow Softer

Important Asian market for LNG has recently only seen sporadic growth with major competitors to US LNG occupying precious market share whilst optimism among US LNG developers is no longer universal.

The story of installed US LNG capacity is certainly one of success – riding a wave of cheap domestic gas made possible through ultra-low interest rates amid robust Asian demand growth meant those US projects first out of the gate could bind portfolio players in long-term take-or-pay contracts that generate healthy returns for capacity developers.

However, the story is beginning to develop in a different direction for said portfolio players and some developers still seeking commitments to proceed with a final investment decision (FID) for both greenfield and brownfield LNG developments.

Weak Asian market fundamentals

Annual Asian demand growth has been elusive in 2019, with overall offtakes broadly stable compared to 2018. At the same time, though, demand in 3Q 2019 was 12% below that of 2018 as offtakes in October and December fell behind.

The absence of growth continued in January this year, with total offtakes in the Far East coming in 2.33% below those of January 2019, our data shows.

Slight silver lining in demand as sliding Brent weighs on prices

Nevertheless, we highlight a silver lining as offtakes over the first three days of February this year are already up 18% vis-à-vis the same period in 2019, according to our LNG Market Tracker, as prices are on a protracted downward trend aided by a slide in Brent. The benchmark had fallen by 21% between 8th January and at the time of writing.

As such, spot prices have tumbled to below $4/mmBtu in the Pacific Basin with forward contracts priced closer to $3/mmBtu. Notably, Torrent Power – a major Indian utility and gas network operator – has awarded LNG tenders for 4 cargoes averaging  $3.60/mmBtu, with the first cargo scheduled for April reportedly priced at $3.10/mmBtu. The cargoes are to be delivered in April, June, October and December this year.

Sino-U.S. ‘Phase-1’ deal unlikely to result in large-scale offtakes

Although China announced to reinvigorate its purchasing of U.S. energy as part of January’s ‘Phase-1’ deal aimed at gradually normalising trade relations, the country as to date maintained its 25% tariff on US LNG. As such, and in view of the prevailing soft Asian LNG market, we remain sceptical at this point on the significance of this announcement for US LNG exports to China.

Even low Henry Hub prices are negated by Chinese tariff on LNG

Whilst the Henry Hub gas price has fallen back to its second lowest point of $1.89/mmBtu on 24th January, the EIA’s most recent available data shows, adding a 25% tariff to liquefaction charges and shipping costs is unlikely to result in netbacks for US LNG exports to China at spot prices.

U.S. trade dispute cut into US LNG’s fledging market share in China

Importantly, the tariffs have resulted in the United States losing much of its fledging market share in China whilst other exporters – chief among them Australia and Qatar – have not been idle and occupied roughly 50% of the Chinese market in 2019, predominantly through long-term contracts. Exporters of US LNG have hitherto not been able to conclude similar deals with Chinese buyers. With the commissioning of Russia’s new Power of Siberia pipeline and renewed import growth of Central Asian gas from Turkmenistan and Kazakhstan competition from pipeline gas suppliers is also to be reckoned with.

Coronavirus outbreak may weigh on China’s imminent energy demand as Lunar Holidays extended

Meanwhile, the announced extension of China’s Lunar Holidays into the second week of February in reaction to the coronavirus outbreak – thereby prolonging the shutdown of industrial capacity – is likely to further curtail China’s energy demand in the short-term.

But enthusiasm has yet to be curbed – at least among some developers

Despite these market pressures, some developers of US LNG capacity remain optimistic amid historically low Henry Hub prices. Nominal US capacity has increased by more than 20mtpa in 2019, and we expect another 17mtpa in 2020. The most recent addition took place at Kinder Morgan’s Elba Island plant, which aims to bring nominal capacity to 2.5mtpa this year.

However, we highlight that optimism does not seem to be universal among US LNG capacity developers. As discussed last week, Cameron LNG put a preliminary stop to the planned ‘Expansion Project’ of Cameron LNG to gain time to assess market developments as trading conditions for US LNG have toughened since 2H 2019.