Page 9 - NorthAmOil Week 13

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Cheniere tender suggests it may cut production
US GULF COAST
CHENIERE Energy, the US’ largest producer of LNG, has made the unusual move of tendering to buy six cargoes of LNG for delivery to Europe later this year. As the company is not a buyer of the fuel, the tender has led to speculation that Cheniere could be testing the market as it weighs output cuts. Citing a survey of traders, Bloomberg reported that this was one possible explanation for the move, the other being that the company is seeking cargoes for its customers that could be cheaper than producing and ship- ping its own LNG from the US Gulf Coast.
Traders familiar with the matter told the news service that four of the six cargoes were awarded at a discount of about $0.20-0.30 to the Dutch Title Transfer Facility (TTF), the European benchmark. The TTF contract for May traded at about $2.24 per million British thermal units ($61.96 per 1,000 cubic metres) on the Intercontinental Exchange (ICE) on March 31.
Cheniere’s move comes after it was reported in February that Spanish utility Naturgy Energy Group had cancelled two cargoes from Cheniere for delivery in April. Buyers typically have to give 60 days’ notice to cancel a cargo, and whilst can- cellations have not been frequent to date, it is anticipated that more will come as storage capac- ity in Europe and elsewhere increasingly fills up.
Cheniere also agreed to sell a prompt cargo from its Sabine Pass terminal last week, which traders cited by Bloomberg said was likely one of
the company’s first ever tenders. The company has historically relied on long-term contracts, but appears to be looking at the spot market in anticipation of future cargo cancellations by its buyers.
During a Scotia Howard Weil investor web- cast last week, Cheniere’s chief commercial officer, Anatol Feygin, said it was “reasonable” to expect that customers would opt not to lift some of their cargoes. This comes as the coronavirus (COVID-19) pandemic exacerbates the global glut of LNG by making demand for the super- chilled fuel collapse as activity around the world slows and many countries remain in lockdown. Companies that cancel cargoes are still required to pay the tolling fees under their contracts with Cheniere. However, as this happens more frequently it will become increasingly difficult for the company to offload unwanted cargoes, potentially forcing it to cut output.
This comes after BloombergNEF warned in a note on February 27 that shipping LNG from the US to Europe or Asia would be unprofita- ble by this summer. Spot prices have declined even further since that note was published, as COVID-19 spread further, prompting a num- ber of countries to take drastic measures. Mean- while, day rates for vessels have risen, further challenging the economics of shipping LNG from the US. This may be a further indicator that it is cheaper for Cheniere to sell cargoes it bought on the spot market.™
Cheniere also agreed to sell a prompt cargo from its Sabine Pass terminal last week.
Companies that cancel cargoes are still required to pay the tolling fees under their contracts with Cheniere.
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