Page 5 - GLNG Week 10

GLNG COMMENTARY GLNG
not willing to renegotiate prices under long-term LNG contracts with India.
Now, however, what has been described as an oil price war between Saudi Arabia and Rus- sia comes as a rare boost during an otherwise challenging time for some in the LNG market. Bloomberg reported on March 9 that an LNG contract with a 12% slope to Brent crude would be trading at a premium of about $1.17 per mil- lion British thermal units ($32.36 per 1,000 cubic metres) to Asian spot prices, down from more than $4 per mmBtu ($110.64 per 1,000 cubic metres) three weeks ago.
Bloomberg noted that this was based on the March 6 close of Japan/Korea Marker (JKM) futures, but the price was little changed this week, which the news service suggested in a separate article illustrated the market’s growing confidence in the benchmark.
Sellers with such long-term contracts would not welcome the change, as such contracts have helped to shelter them from the global glut of LNG that has depressed the spot market. How- ever, for buyers, long-term contracts are once again looking more attractive, though the change will not be immediate as oil-indexed contracts are typically sold based on an average crude price over the previous 3-6 months.
On the downside, however, this could throw some new projects into question, as their eco- nomics based on oil-linked contracts may no longer appear as favourable as before. A number of planned LNG projects were already on shaky ground owing to the global glut of the fuel and the issue of oil-linked LNG pricing further com- plicates the picture for them.
Demand hopes
The other potential benefit of the oil price
collapse – that it could help boost production – could take longer to materialise. Consultancy Wood Mackenzie said this week that it expected gas production in the Permian Basin – increas- ingly a leading output region for the US thanks to large volumes of associated gas – to slow down as drillers cut back.
Genscape, an energy intelligence firm owned by Wood Mackenzie, estimated that by the end of 2020, US gas production will be 900mn cubic feet (25.5mn cubic metres) per day lower than previous, pre-crash projections. This trend could be extended in 2021 if oil prices do not recovery quickly – which they appear unlikely to do.
However, with the exception of facilities on the US Gulf Coast, most LNG projects globally use non-associated gas as feedstock. As a result, Wood Mackenzie expects little direct impact on LNG supply in the short-to-medium term.
In a further complication, Wood Macken- zie’s research director, Giles Farrer, noted that as associated gas volumes in the Permian fall, this could push up Henry Hub prices, to which some US LNG producers index their output. This could make these US LNG producers less competitive with oil-indexed LNG, according to Farrer.
However things play out, the coming months will bring clarity over the impact of the oil price crash on LNG. In the meantime, though, the effects of the coronavirus outbreak remain another major unknown. In early March, Chi- nese buyers cancelled more LNG cargoes – and the world is bracing for the pandemic’s effects to be felt more strongly elsewhere, such as across Europe. The longer the pandemic continues, the more the LNG industry – among many others – stands to suffer.™
With the exception of facilities on the US Gulf Coast, most LNG projects globally use non- associated gas as feedstock.
US LNG producers could be affected by Henry Hub gas prices going up in the longer term.
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