After an eventful start to 2021 that witnessed the unexpected winter storm in Texas and blockage of the Suez Canal, will the stage finally be set for global LNG to return to growth in summer 2021? Alex Froley, LNG Market Analyst at ICIS summarises key developments and performances in the first quarter of 2021 and explores what suppliers and buyers would be watching out for as we move into warmer weather.
The first quarter of 2021 saw LNG exports rise by just 1% from the same period last year. Cold weather in Asia increased LNG flows by some 8.3 million t from the year before but Europe flows dropped by 7.1 million t, compensating with pipeline gas and increased storage withdrawals. However, March showed a sharp recovery with 7% growth y/y, giving a strong indicator of the recovery in LNG exports this spring. This trend is set to continue, partly driven by demand to refill Europe’s onshore gas storage sites.
Volatile prices in the early part of 2021
The early part of this year has shown the potential for short-term volatility in LNG prices, fuelled by outages, shipping congestion and strong demand. This has made buyers wary of relying on short-term spot buying and raised concerns about switching long-term contract volumes from oil to spot market indexation. The volatility of oil prices, however, means the best procurement strategy may come from a diversified portfolio with a mix of contracts and indices.
The average ICIS East Asia Index for spot cargoes assessed during January - March was US$9.143/million Btu. Despite the price spikes of January, this remained below the average crude oil price assessed during the period of US$10.585/million Btu, suggesting that indexing to the oil market may not always be an automatic gain for buyers. The average front-month ICIS TTF price for European gas during the period was US$6.486/million Btu.
A tight supply/demand balance in China, Japan, South Korea and Japan, exacerbated by local production outages during repairs to the Gorgon LNG plant in Australia, extreme cold weather, and power blackouts in parts of China and Japan, pushed spot prices to over US$30/million Btu in January for a handful of cargoes purchased as last minute supplies. When comparing this with trades at around US$2/million Btu during periods of oversupply in the summer of 2020, this shows the potential for extreme market volatility overs short periods. That said, prices would not have spiked so much if supplies had been bought two or three months earlier at prices below US$10/million Btu. However, most LNG cargoes into Asia remain on long-term contracts, normally with prices linked to the crude oil market.
The high spot prices in January in Asia were driven by sourcing replacement supplies for the lost production from the US, requiring much longer transits. However, these were further compounded by congestion on the Panama Canal, forcing some ships to take longer routes, and the unexpected blockage of the Suez Canal in March, raising concerns over the security of supply and market volatility.
Changes in exports: The risers, fallers and steady players across the world
On the up…
The theoretical capacity of the market has been steadily increasing over the past year, with the US bringing on almost 15 million tpy of new output capacity with the start-up of third trains at the Cameron, Freeport, and Corpus Christi plants. However, actual production and exports slumped in summer 2020 due to low global gas prices after a warm winter and the impact of the coronavirus pandemic on gas demand. US plants cut back heavily and then faced a slow restart due to hurricanes in the Gulf of Mexico in autumn 2020, followed by the deep freeze in Texas in February 2021.
In March, the recovery of domestic gas production allowed feed gas into US liquefaction at record rates over 312 million m3/d and the US showed the biggest y/y increase with exports up 2.4 million t from 1Q20.
Fuelled by the Damietta plant returning to service for the first time since 2012, the first quarter this year also saw Egypt increase exports to 2.0 million t: five times the exports in 1Q20. Rising domestic production from fields including Eni’s Zohr and Nooros fields means the country can now meet its own demand while raising exports. Algeria also increased y/y output in 1Q from 2.6 million t to 3.3 million t with the Skikda plant coming back online following repairs which were completed in July 2020.
Exports from Qatar, the world’s biggest LNG producer, and Australia were both relatively stable at approximately 20.0 million t. Although also maintaining steady exports, Malaysia, which was the first country with a floating production unit achieved start-up of its second floating production facility, PFLNG Dua, with the first cargo being loaded on 22nd March 2021.
Russia, Norway, Nigeria, Trinidad and Equatorial Guinea all saw y/y decline of LNG exports during the first quarter. Norway dropped to zero with the closure of the Hammerfest LNG plant following a fire in September 2020. The plant is scheduled to re-open in October 2021. Falls in exports from Nigeria and Trinidad tonnes are likely related maintenance and decline of local gas fields.
In February 2021, Qatar took a final investment decision to go ahead with its massive North field expansion, which will boost its annual output from 77 million tpy to 110 million tpy by 2025. This will place the country as the clear leader in export volumes. It is also pushing ahead with other parts of the supply chain with orders for more ships, booking long-term regasification capacity in Europe, and signing new long-term contracts, including a recent 10-year 2.0 million tpy deal with China’s Sinopec.
Although Chevron has completed the works to fix propane kettle cracks on two of its three-train Gorgon plant in Australia, the third train may undergo work later in the year. Downturns in Equatorial Guinea’s exports should be halted by the start-up of new feed gas from the Alen gas field into the country’s Punta Europa plant.
East Asia remained the biggest import region, importing an additional 8.3 million t compared to last year, giving a 1Q total of 61.4 million t. Sparked by a cold winter, Japan regained its position as the biggest importer, overtaking China’s 4Q lead with an increase of 1.8 million t compared with 1Q20, making its total 23.2 million t. China’s 1Q imports grew by a third, but this was mainly due to the fall in flows last year with the onset of the coronavirus. South Korea and Taiwan also saw increases, as did Central and South America, with Brazil as the biggest climber due to increased gas-fired generation as reduced rainfall reduces the potential of hydropower production.
Europe, on the other hand, saw imports fall by 7.1 million t, although March showed signs of recovery with a noticeable upturn in demand. Imports in the Middle East have also dropped due to the increase in the area’s own gas production. Southeast Asia saw declines, mainly due to halving of Malaysia’s imports to 0.4 million t.
After turbulent markets influenced by weather, power shortages, shipping disruptions and a global pandemic, LNG markets look set to rise for the rest of 2021, driven by a strong period of growth over the summer in the US with feed gas back to a record rates of over 11 billion ft3/d.
Following a cold winter, Europe’s onshore gas storage facilities are much emptier, and buyers will need to buy considerably more gas this summer than the last two years to refill stocks. The increase in European injection requirements this summer is thus almost twice as big as last summer’s US curtailments, suggesting there should be room for a steady flow of cargoes across the Atlantic. That also means there should be room to take up an extra 2.25 million tpy of output over six summer months from the 4.5 million tpy Corpus Christi train 3, which was not in operation at the same time last year.
The industry in East Asia may look to review its gas storage capabilities and other security of supply measures considering the winter price spikes and canal disruption. China is taking steps to boost its onshore gas storage, but currently still has far less storage as a proportion of its annual gas demand than Europe.
As always, the weather will be a crucial factor next winter. If the weather is very cold, the market could face some tight periods, although some buyers will be better prepared this year having learned from recent experiences. However, if next winter goes back to the mild weather of the 2018/19 and 2019/20 winters, the market could be starting to look quite long on gas again by spring 2022.
To download the full ICIS LNG Edge: Q1 2021 Trade Flow Report, please visit here.
Read the article online at: https://www.lngindustry.com/special-reports/03062021/lng-markets-springing-back/
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