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Rystad identifies LNG producers best positioned to cut output as COVID-19 erases profits

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LNG Industry,

As global LNG benchmark prices continue to fall due to oversupply on account of COVID-19, LNG producers with short-run marginal costs (SMRCs) that exceed spot prices are increasingly looking to curtail production.

A Rystad Energy analysis has found that those best positioned to reduce volumes, while suffering the least possible financial damage, are APAC LNG terminals, specifically the Eastern Australia projects and NWS LNG, plus some US plants that have been operational for a longer period of time such as Sabine Pass and Cove Point.

These US facilities were built during recent bullish sentiment, which expected sustained demand growth from APAC buyers; medium sized compressors offered a good mix of low unit production costs and relatively low gas quality variation (i.e. low liquids content). These same factors are now working against producers and, with relatively little arbitrage between feed gas prices and their target customers’ benchmarks, it would appear the most economic option for them will be to ramp down production.

This means that they will have some capability to reduce LNG production without fully shuttering facilities and could keep some trains online to continue producing vital ethane in preparation for restarting, should prices rise in the mid-term.

Additionally, APAC LNG terminals have high feed gas costs, low liquid revenues and smaller LNG compression strings that make them strong candidates for curtailing production.

“The word of caution on taking this course of action is that pulling this lever requires a clear exit strategy with a defined threshold in gas prices, at which point renewed production would make economic sense once again – ramping up only to have to halt production again months later could spell disaster,” says Dane Inglis, analyst at Rystad Energy.

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