According to the latest analysis from Fitch Ratings, the possibility of an oversupplied LNG market, combined with more competitive Asian LNG prices, has introduced an uncertain outlook for projects in the US.
Fitch believes that the global LNG market may become oversupplied over the next five years, as new LNG capacity comes to market. Global LNG capacity, which includes existing and under-construction projects, is anticipated to reach approximately 420 million tpy by 2020.
In an LNG oversupply scenario, Fitch anticipates that the prospects for new US LNG capacity would weaken as other established LNG players, such as Qatar and Australia, could price at operating costs. The US LNG fixed take-or-pay payments, opportunity cost of Henry Hub (HH) natural gas domestically, and distance from LNG demand centres could hinder the progress of projects in the US.
Reduced US contracting and final investment decision (FID) momentum, including BG’s decision to delay FID on Lake Charles LNG until 2016, suggests that offtakers are re-evaluating and looking for improved visibility on economics in the longer-term.
While Fitch expects oil-linked LNG prices to provide US projects with favourable Asian export prospects, the possible delinking of Asian LNG and oil prices could increase the economic dependence of US LNG on low HH prices to stay competitive. Fitch expects Asian counterparties will seek more competitive LNG prices. The possible LNG supply/demand imbalance, in conjunction with Asia's large import market position, rising mix of non-long-term LNG trade, and estimated LNG contract expiration profile may provide Asian LNG importers with more pricing leverage.
Recent Brent oil and HH pricing of approximately US$65 - US$70/bbl and US$2.50 - US$2.75/million Btu, respectively, creates an attractive oil-linked Asian export opportunity for US LNG. However, recent lower spot prices for Asian and European LNG deliveries provide near break-even margins. This difference in LNG economics occurs despite HH prices being at historic lows and illustrates the pricing support provided by oil-linkage.
In conclusion, Fitch believes that additions to new US LNG capacity will slow considerably over the medium-term. New capacity in the US is expected to be mainly comprised of under-construction and later-stage development projects and train expansions. Fitch expects brownfield projects to remain favoured due to their capital cost and, to the extent regasification terminals are made available, operational flexibility advantages. This should lead to a crowding out of greenfield projects. However, greenfield projects may improve their prospects by reducing capital costs and/or accepting lower returns.
Adapted from press release by Katie Woodward
Read the article online at: https://www.lngindustry.com/regasification/08052015/fitch-warns-of-us-lng-problems-716/