U.S. LNG exporters could lose money for years, analysts say

(Bloomberg; July 18) - Plans for more U.S. liquefied natural gas exports have multiplied as a global supply glut has developed, raising the prospect that some exporters may lose money for several years. Analysts say the surplus also increases the likelihood that some contracts could be renegotiated, some projects may be delayed long enough to get past the oversupply period, and some plans may never come to fruition at all.

Fast growth in global LNG demand should eliminate the surplus in five or six years, so there could be reason to delay projects and become part of the next supply wave, analysts told Bloomberg. But until then, markets — rather than lawmakers, regulators or activists — will pose obstacles to profitable exports. “Margins are going to be squeezed for years,” said Kenneth Grant, of Compass Lexecon, a subsidiary of FTI Consulting.

About 70 percent of global LNG is consumed in Asia where, currently, spot-market prices are about $5.50 per million Btu. LNG from the U.S. delivered to Asia, however, costs $8 to $9, taking into account the cost of the gas, liquefaction and transportation. “Buying LNG at these prices is a guarantee of losing money,” said Fereidun Fesharaki, chairman of global energy consultancy FGE.

While several U.S. projects are under construction, U.S. LNG is only being shipped from Cheniere Energy’s plant in Louisiana, and customers are struggling over price. GAIL (India), one of the customers, reportedly wants to renegotiate its contract. The pressure for renegotiations may build as top LNG traders see the growing risk of losses. Some buyers, Fesharaki said, especially the national oil companies of some LNG-consuming countries, may walk away from deals and trigger legal battles if they can’t renegotiate.

Read more: Oil and gas news briefs for July 20, 2017

U.S. could be 2^nd-largest LNG producer by 2022, says energy agency

(Reuters; July 12) - The U.S. could become the world's second-largest exporter of liquefied natural gas by the end of 2022, just behind Australia and ahead of Qatar, the International Energy Agency said. Global LNG export capacity will reach almost 23 trillion cubic feet of gas a year by the end of 2022, compared to less than 16 tcf in 2016, the IEA forecast in its annual report on gas markets. Australia would have capacity to export 4.16 tcf a year, followed by the U.S. at almost 3.8 tcf a year and Qatar at 3.7 tcf.

"By the end of our forecast period, the United States will be well on course to challenging Australia and Qatar for global leadership among LNG exporters," said the report by the Paris-based agency. However, all that new LNG capacity is being added to an already well-supplied market while demand is falling in some of the traditionally large importing nations, such as Japan, the IEA said.

Without a big boost in LNG demand, the market would have 6.7 tcf in excess annual capacity, the IEA said, putting pressure on prices and discouraging new upstream investment. Current low prices are already making it tough for exporters, as competition is loosening the typically rigid contracts that have dominated the long-distance trade. "This change will be further accelerated by the expansion of U.S. exports, which are not tied to any particular destination and so will play a major role in increasing the liquidity and flexibility of LNG trade," the IEA said.

Read more: Oil and gas news briefs July 17, 2017

Tokyo Gas will push for lower LNG prices, better contract terms

(Reuters; July 13) - Japan's Tokyo Gas, the biggest city-gas supplier in the world's largest importer of liquefied natural gas, is in talks to renew supply contracts and will push to revise terms to get more flexibility and cut prices, an official said July 13. The push for better terms, a big concern among Japanese utilities after the 2011 nuclear disaster led to a surge in LNG imports and drove up prices, got a boost when Japan's antitrust regulator last month ruled restrictive supply contracts were anti-competitive.

"We have renegotiations under way, including price review," said Takashi Higo, senior general manager at the gas resources department of Tokyo Gas. "There will be tough negotiations (with suppliers) and it will take a lot of time," he told reporters at an energy conference. The Fair Trade Commission ruling that so-called destination clauses which restrict resale of LNG cargoes are anti-competitive is likely to lead to more trading by buyers in Japan and could prompt challenges to similar restrictions elsewhere in Asia.

Asian LNG buyers have long complained that destination clauses in contracts unfairly restrict trading of the fuel at times when it would make more economic sense for buyers to sell their unneeded supplies to other markets. Higo said Tokyo Gas has 12 supply contracts and is reviewing the terms to decide what action to take. Tokyo Gas has long-term deals for gas from Qatar, Brunei, Malaysia and Russia's Sakhalin LNG project, as well as five projects in Australia. The contracts expire between 2021 and 2039.

Read more: Oil and gas news briefs for July 13, 2017

Expansions better able to compete with Qatari LNG than new projects

(Bloomberg; July 6) - As if billions of dollars of liquefied natural gas project cost overruns and the prospect of a global oversupply well into the next decade weren’t enough, proposed export developments now face increased competition from the world’s biggest producer. Qatar’s announcement July 4 that it would boost its production comes as more than two-thirds of new LNG projects proposed for the next decade from Texas to Australia have yet to take final investment decisions.

Expanding existing LNG plants will likely be more successful than starting from scratch at new sites, said Sanford C. Bernstein analyst Oswald Clint. There may be opportunity for U.S. projects that already have existing infrastructure and would be cheaper to develop, such as an expansion of Cheniere Energy’s Sabine Pass, La., plant, Bernstein said. The research firm in May said more than two-thirds of proposed projects around the world chasing to fill an expected supply gap in the mid-2020s are unlikely to be built.

“The incremental LNG from Qatar is likely to be relatively low cost … certainly able to undercut supplies from potential new greenfield projects,” said Martin Lambert, managing director of Brightlands Energy, a U.K. consultant. “It will probably also undercut incremental supplies from the U.S. or Australia.” U.S. LNG only becomes competitive into the Far East with oil at $60 to $70 per barrel, said Claudio Steuer, director of SyEnergy, a U.K.-based energy consultant. Crude oil is trading below $50.

Read more: Oil and gas news briefs July 10, 2017

Qatar’s LNG expansion could delay other proposed export projects

(Platts; July 5) - Qatar’s announcement that it will double the size of its proposed new development for the giant North Field to 4 billion cubic feet of gas per day and use much it for export will throw off course proposed liquefied natural gas projects elsewhere in the world. The LNG market already expects a glut of new supply, and it’s uncertain how it all will be absorbed. In 2017 alone, 42 million tonnes of new annual liquefaction capacity is expected to come on stream, primarily in Australia, the U.S. and Russia.

The 2017 additions will come on top of 42 million tonnes of additional annual capacity in 2015-2016, and a further 67 million tonnes coming in 2018 and 2019. The construction list then starts to run dry, as companies have delayed investment decisions amid weak market conditions. Overall global LNG capacity will have expanded from 304 million tonnes per year in 2015 to almost 460 tonnes by 2020 — a 50 percent increase in five years. The ongoing supply wave is expected to depress spot-market LNG prices.

The prospect of plentiful, cheap LNG is encouraging the construction of more import terminals, and demand is gradually expected to absorb the increase. But demand growth is not expected to erase the surplus until sometime around 2023-25, making the timing of new LNG capacity crucial — developers want to start up as the surplus erodes and prices recover. But the addition of more Qatari capacity could delay new projects by at least a couple of years and risk extending the supply glut further into the 2020s.

Read more: Oil and gas news briefs for July 6, 2017

Indian importer wants to renegotiate lower price for U.S. LNG

(Reuters; June 30) - India's importer of U.S. liquefied natural gas is trying to renegotiate prices with its U.S. supplier, sources said, possibly undermining plans by President Donald Trump to export more gas to the fast-growing Asian nation. Any new LNG sales to the nation of 1.3 billion people will depend on how GAIL India and Cheniere Energy, which operates an LNG terminal in Sabine Pass, La., deal with a long-term supply contract that GAIL signed in 2011, at an estimated value of $22 billion.

GAIL signed to take 3.5 million tonnes of LNG per year for 20 years from Cheniere, but is now asking to renegotiate the price. A commissioning cargo was sent last year, but supplies in earnest will likely start in 2018. "At current U.S. prices, the landed cost of the LNG (in India) is not very attractive," said a source on condition of anonymity. "We are trying a mix of options on pricing, and renegotiating is one of them," the source said. "My perception is that the talks with Cheniere … are not very likely to succeed."

The contract price is based on the cost of feed gas, plus 15 percent more for gas consumed at the plant, plus a liquefaction fee of $3 per million Btu. Add in shipping, and at today’s U.S. gas prices the LNG would cost about $8.50 per million Btu landed in India. Spot-market prices are under $6. R.K. Garg, of Petronet LNG, India's biggest importer, said that at current oil prices, long-term LNG contracts are being offered at $6 to $7. Mangesh Patankar, with energy consultancy Galway Group, said GAIL is struggling to sell its contracted U.S. LNG to end-users that are demanding lower prices.

Read more: Oil and gas news briefs July 3, 2017

China invests billions in floating LNG projects offshore Africa

(Reuters; June 26) - China plans to pour almost $7 billion into floating liquefied natural gas projects in Africa, betting on a largely untested technology in the hope that energy markets will recover by the time the facilities could start production in the early 2020s. Western banks are wary due to the depressed state of the shipping and LNG markets, as well as the technical difficulties of pumping gas extracted from below the ocean floor, chilling it into liquid form on a floating platform and transferring it into tankers for export.

China, however, is making a strategic push into floating LNG, aiming to become the lowest-cost seller of the complex offshore plants and looking to lead the global roll-out of a technique that remains in its infancy, with only one project in commercial production so far (in Malaysia). China needs gas as a cleaner alternative to coal under a drive to improve air quality in its cities, and has already lent $12 billion to Russia's Yamal LNG project in the Arctic as U.S. sanctions scared away Western banks.

China has lent or committed almost $4 billion to three floating LNG ventures in the African nations of Equatorial Guinea, Mozambique and Cameroon. It plans not only to provide funding but also build the production platforms for two more projects totaling $3 billion. The projects are attractive to resource-rich but debt-burdened African countries. The facilities can sail into place, drop anchor, and begin exporting for much less than the cost of onshore plants. That, at least, is the theory. The reality is that the technology remains complex — challenges include tight quarters, wave motion and ocean currents.

Read more: Oil and gas news briefs June 29, 2017

U.S. seeks to reassure China of support for LNG trade

(Financial Times; London; June 22) – President Donald Trump is engineering a sharp shift in U.S. energy policy by using natural gas exports as an instrument of trade policy, championing sales to China and other parts of Asia to create jobs and reduce U.S. trade deficits. The goal of the push is to help U.S. companies land LNG sales contracts in energy-hungry nations across Asia, including Japan and India.

Commerce Secretary Wilbur Ross and Energy Secretary Rick Perry have both in recent weeks stressed the Trump administration’s desire to help find Chinese buyers for American LNG, shipped from multibillion-dollar terminals being built along the U.S. Gulf Coast. While there were no special restrictions on LNG sales to China in the Obama era, an executive with the first Gulf Coast LNG exporter, Cheniere Energy, said political disputes over energy policy in Washington had made potential Chinese buyers jittery.

To soothe nerves, the Commerce Department in May issued a statement that said the U.S. “welcomes China” as a buyer of U.S. LNG and “treats China no less favorably” than other countries with equivalent trade status. “The Chinese … were looking for that sort of reassurance that the U.S., the president, supports U.S. energy exports,” said a White House official. But while Trump wants to export more gas, analysts say the main limitation today is a glut of supply in the international market.

Read more: Oil and gas news briefs June 26, 2017