US LNG is now a live test case for flexible volumes

Author: Ruth Liao

2016/05/12

ICIS has this week launched a daily US LNG free on board price assessment and added shipping costs and netback values from Sabine Pass to 23 import destinations.

Just short of 70mtpa in nameplate US LNG production has been commissioned or is on track for commissioning by 2019 from five projects: Cheniere’s Sabine Pass, Sempra’s Cameron LNG, Freeport LNG, Dominion’s Cove Point and Cheniere’s second project, Corpus Christi.

While the rise in exports will be steady this year and next it will accelerate in 2018.

By the end of 2016, Sabine Pass Trains 1 and 2 will be in operation and, by 2017, another three trains from Sabine and Cove Point could start up (see chart). By 2018, this will ramp up to a schedule of up to five new trains online from Cameron, Freeport and Corpus Christi. By 2019, another four trains from Freeport, Corpus Christi and Sabine are due online.

The first commissioning cargo produced by US-based exporter Cheniere from the 4.5mtpa Sabine Pass Train 1 earlier in February was marketed on a prompt basis to Brazil’s state-run energy company Petrobras. The train’s seven commissioning cargoes represented the pull of incremental spot cargoes toward destinations representing the highest netback.

Tenders held by buyers in Argentina and Dubai led to short-covering opportunities by the trading companies that participated and not necessarily Cheniere itself. While the cargoes were sold on a delivered ex-ship (DES) basis by Cheniere, which could utilise its shipping length, the transactions often represented a waterfall of trades between various entities.

The move to the destination-free FOB model for long-term US LNG contracts that was marked by Cheniere’s deal with BG Group is now being realised.

US LNG cargoes are expected to supplement supply into South America and Europe, with ICIS LNG shipping costs from the US Gulf to both regions currently in a range of $0.30-0.50/MMBtu.

This reflects the proportion of interest in US LNG long-term contract holders, which primarily will be portfolio companies such as Anglo Dutch Shell, Spain’s Gas Natural Fenosa and Paris-based ENGIE over the first few years.

The opportunities for US LNG to head to Europe are also now being laid out, with companies such as Cheniere leveraging options on the Dutch TTF gas hub through agreements with European capacity holders such as France’s EDF, or trading companies from Asia examining British NBP and TTF strategies. The Dutch TTF is gaining traction as a reference point for LNG pricing in the Atlantic basin as a whole.

The opening of the Panama Canal expansion, which is now expected in late June, will also help create new shipping flows from the US Gulf to Asia, although the arbitrage opportunities in the current market have deflated the potential savings. However, this could lead to what would currently be close to a $1.30/MMBtu reduction in shipping cost from Sabine to Tokyo.

A vessel traveling at 16 knots could make the voyage from Sabine Pass to Tokyo in 26 days via the Panama Canal, including time for transit of the canal, compared with 37 to 43 days, heading either through the Suez Canal, around Africa’s Cape of Good Hope or South America’s Cape Horn.

The abundance of US natural gas supply is expected to continue to cover the ramp up of LNG exports.

How much the US will export to global LNG markets will also depend on broader supply and demand. In Europe, the role of Russian and Norwegian production as competing supply will be key.

New LNG production from Australia and flexible Qatari supply will also compete, along with questions over east Asia’s long-term demand and the potential arrival of new, smaller buyers to the market.

The daily US Gulf FOB assessment is published in LNG markets daily with shipping and netback prices in the weekly Global LNG markets. ruth.liao@icis.com