Page 7 - NorthAmOil Week 17

NorthAmOil COMMENTARY NorthAmOil
of most US offtake contracts, buyers that cancel cargoes only have to pay the tolling fee, in con- trast with more traditional LNG contracts that typically involve take-or-pay clauses.
LNG producers will not generally comment on commercial arrangements with their cus- tomers. However, Reuters reported Cheniere as noting that its contracts allow for flexibility, including the option not to lift cargoes but still pay a liquefaction fee. This model still ensures cash flow to the LNG producer, but generally makes it cheaper for buyers to cancel cargoes than the take-or-pay model, which involves the full cost of the volume they are contracted tobuy.
It is also easier for US LNG producers to moderate LNG production in response to mar- ket conditions, as their liquefaction terminals are not linked to a dedicated upstream supply source. Instead, US LNG terminals have access to an interconnected domestic gas supply net- work that allows for a variety of feedstock supply options.
However, these conditions mean that US LNG projects are going to be particularly vul- nerable to cargo cancellations this year – with more being predicted for the coming months. In addition, they may be more likely to cut back on output.
What next?
A potential exacerbating factor is that new liq- uefaction capacity that was already under con- struction before demand crashed is still coming online. On April 22, Sempra Energy announced that it had begun introducing feed gas to the third train at its Cameron LNG project in Lou- isiana. (See: Sempra introduces feed gas to third Cameron LNG train, page 11) Beyond capacity
that is already under construction, however, LNG producers globally are hitting the brakes on sanctioning new projects.
As the LNG industry braces for the market to deteriorate further, this has also resulted in the increasing use of floating storage as a tem- porary solution while onshore storage fills up. The economics of floating storage are generally not thought to be favourable, but all options are currently being considered.
The commoditisation of LNG has also led to a growing variety of intermediaries and con- tract terms that allow traders to optimise returns through various means, including by swapping cargoes with each other, diverting shipments or in some cases taking longer routes. And some sellers have been offering unwanted volumes through tenders.
A number of buyers remain despite the over- supply, and are trying to take advantage of record low spot prices. Reuters reported last week that companies seeking cargoes currently included Turkey’s Botas, Kuwait Petroleum Corp. (KPC), Germany’s EnBW EBKG.DE and China’s Shen- zhen Energy.
It is also likely that LNG producers will increasingly turn their attention to China as the Asian country opens up again after being the first to impose a lockdown in response to COVID-19. The first US LNG cargo in 13 months was deliv- ered to China on April 20, after tariff exemptions were introduced following a preliminary deal between the two countries to end their trade war. At least five other LNG tankers were head- ing for China as of April 19. However, how much LNG the country will be able to absorb remains uncertain and China is reopening with caution as COVID-19 continues to hit other parts of the world hard.™
A number of buyers remain despite the oversupply, and are trying to take advantage of record low spot prices.
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