US LNG: shifting focus

In September 2014, spot and contract prices for Asian LNG were around US$15/million Btu, an attractive target for dozens of new US export project developments. Fast-forward into 2015 and Asian LNG prices have collapsed to half that level. The LNG spot market is swamped with surplus cargoes and the decline in crude oil prices is dragging down long-term contract prices.

More than 100 million tpy of new liquefaction capacity is under construction and due to be commissioned by the end of 2019. This new capacity now threatens to tip the global gas market into a state of pronounced oversupply. The market conditions that are developing in 2015 are set to redefine the investment economics of US export projects and the role of US LNG in the global gas market.

Global gas price shock

In order to understand the emerging role of US LNG exports, it is useful to take a step back and view current global gas market conditions in the context of the recent past. There have been several distinct phases of global gas pricing over the last decade, as outlined in this article.

2006 – 2008: commodity super cycle

The gas market was dragged along in a highly correlated boom/bust cycle in global commodity markets. However, regional price convergence remained relatively strong, as did the linkage between spot and oil-indexed contract prices as a result of optimisation of contract flexibility.

2009 – 2010: gas supply glut

Growth in US shale production, new LNG liquefaction capacity and the global financial crisis combined to rapidly push the global gas market into a phase of oversupply. The surge in domestic production moved the US into a position of gas self-sufficiency.

2011 – 2014: Fukushima tightness

A more than 20% y/y increase in Japanese LNG demand precipitated a phase of tight and volatile spot LNG markets. This induced substantial volumes of European LNG supply to be diverted to higher priced markets, with US Henry Hub prices disconnecting from the rest of the global market. A surge in US export project applications was driven by the premium of Asian prices over Henry Hub and the expectation that this would continue for the foreseeable future. In addition, projects were supported by the level of European hub prices which would, if necessary, represent a viable ‘secondary market’ for US LNG in excess of Asian market volume requirements.

2014: entering a new phase

The second quarter of 2014 marked the start of a new phase in global gas pricing. As a warning sign, Asian spot LNG prices halved across the first half of 2014, from US$20 to US$10/million Btu. This was exacerbated by …..

This article originally appeared in the April 2015 issue of LNG Industry. To read the full version of this article, sign in or register for a free subscription today.

Written by David Stokes, Olly Spinks and Howard Rogers, Timera Energy, UK. Edited by Callum O'Reilly

Read the article online at: https://www.lngindustry.com/special-reports/09042015/us-lng-shifting-focus-565/