Page 8 - NorthAmOil Week 16

NorthAmOil COMMENTARY NorthAmOil
LNG market bracing for inevitable shut-ins
LNG shut-ins are thought to be looming, and some regions where the fuel is produced are more vulnerable than others
GLOBAL
WHAT:
Shut-ins of LNG production are thought to be imminent.
WHY:
There appears to be no short-term relief for the global glut of LNG, and more supply will come online this year.
WHAT NEXT:
There are hopes that China will be able to absorb more LNG as its activity gradually recovers.
AS global LNG oversupply steadily worsens, there is a growing consensus that shut-ins are necessary and inevitable. There is also an increasing amount of speculation over which players will be the first to curtail production.
For indications of what is likely to play out, the industry has been examining the econom- ics of LNG from various regions. However, even LNG producers with more economically viable projects may wish to bring forward or extend periods of maintenance in order to minimise losses during periods of particularly low spot prices.
Under pressure
For US LNG producers, greater distances to Asian markets are a disadvantage. In addition, the nature of most US offtake contracts means that buyers that cancel cargoes only have to pay the tolling fee, whereas contracts with exporters in Australia or Qatar typically involve take-or- pay clauses. This perhaps explains why some of the cancelled cargoes reported to date involve shipments from US LNG terminals, and poten- tially leaves US producers of the fuel more vul- nerable to further cancellations.
There are also questions over how gas produc- tion trends in the US will play out – with poten- tial concerns arising over the price of feedstock gas for liquefaction terminals. Growing volumes of US shale gas in recent years have come from the Permian Basin, where gas is a by-product of drilling for oil. With the West Texas Intermedi- ate (WTI) price languishing below $20 per bar- rel on April 16, despite the OPEC+ agreement to cut global production by 9.7mn barrels per day (bpd) from May, Permian drillers are announc- ing major reductions to capital spending for 2020. This is already translating into falling rig counts and will soon result in lower output as well. This will likely push up US gas prices, put- ting further pressure on the economics of the country’s LNG production. The effect is likely to prove short-lived though, as any uptick in US gas prices will encourage drilling for shale gas, and the nature of shale means it can come back online quickly, rebalancing prices.
Not immune
Some Australian LNG producers are also unlikely to emerge unscathed, given their break- even costs. Origin Energy, a 37.5% shareholder
Cancelling cargoes from US terminals is likely to be cheaper than those from Australia or Qatar because of how US offtake contracts are typically structured.
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Week 16 23•April•2020