20 August 2018 | Alex Froley, ICIS LNG Analyst
East Asian spot LNG prices strengthened from mid-July to mid-August as a heatwave in Japan drove electricity demand for air-conditioning higher. This led Japanese utilities to re-enter the market looking for spot cargoes for September and October to replenish their storage tanks ahead of next winter.
The Japanese city of Kumagaya, northwest of Tokyo, reported a temperature of 41.1 Celsius in late July, the highest ever recorded in Japan, and the country’s meteorological agency declared the high temperatures “a natural disaster.”
There was also buying interest heard from South Korean companies including KOGAS, KOMIPO and POSCO and from south Asian buyers including India’s GSPC, adding to the competition.
The ICIS East Asia Index (EAX) for September rose from $9.850/MMBtu in mid-July to $10.650/MMBtu in mid-August, averaging at $9.965/MMBtu across the period. That was a 71% increase from the previous year, when the EAX had averaged a little under $6.00/MMBtu.
The oil markets, which are used to set the prices of many long-term LNG import contracts, also strengthened over the year, but less than LNG, showing the extra pressure added to the spot LNG market by immediate physical factors. Brent crude during the period averaged $12.703/MMBtu, some 44% higher than the previous year.
The South America Index (SAX) dipped late July before strengthening in early August due to the influence of east Asia. It averaged $9.085/MMBtu over the period.
The Northwest Europe Index (NEX) averaged $7.446/MMBtu, more stable across the month. Europe draws most of its supply from pipeline gas markets, where the prices are not set in competition with Asia. The spread between the NEX and EAX widened from around $2.300/MMBtu at the start of the period to almost $3.000/MMBtu at the end. This remains wide enough to encourage tankers to reload cargoes from European storage tanks to take east to Asia.
Yamal train 2 starts early
A number of ballast vessels were seen heading to northwest Europe in the period, both to carry out reloads, and to transfer cargoes from Yamal LNG ice-breaker ships. To maximize the use of the ice-breakers in the Arctic, the ships serving northern Russia’s Yamal project switch their cargoes onto other ships at ports such as Gate in the Netherlands and Montoir in France for onwards delivery.
Such transfer operations look set to increase, with Yamal LNG launching its second 5.5 million tonnes per annum production train in early August, six months ahead of schedule. The first cargo, aboard the 170,000cbm Pskov, left Yamal on 8 August on a heading to Montoir. Yamal is now at 11.0 mtpa capacity. Third and fourth trains could take it to 17.4 mtpa by the end of 2019.
In Australia, Chevron’s 4.5 mtpa Wheatstone train two has reached nameplate capacity, but the offshore floating production projects Ichthys and Prelude remain in start-up phase. The first exports of hydrocarbons (which include LNG, LPG and condensates) from Ichthys are expected sometime during September to December this year, while Shell recently said it was connecting up the subsea wells for the Prelude project, with the exact date of first LNG export unclear.
Wheatstone train two will undergo a brief outage in August to remove strainers. The 5.2 mtpa Angola LNG project returned to action early August after a planned outage in July, launching several spot sell tenders. Peru’s 4.5 mtpa Pampa Melchorita shut late July for a planned outage due to last until mid-August.
On the downstream side of the market, China’s ENN imported the first cargo to its 3.0 mtpa Zhoushan terminal in Zhejiang province in early August, aboard the 146,000cbm Stena Blue Sky.
LNG Edge shows the 146,000cbm Stena Blue Sky delivering the first cargo to ENN’s new Chinese import terminal at Zhoushan.
Politics and trade
As the trade war between the US and China continues, China announced it would introduce 25% tariffs on LNG imports from the US, although it did not specify an implementation date. LNG had been excluded from earlier lists of goods facing tariffs.
The US sent 22 LNG cargoes to China during January to July 2018, and 30 during 2017. Exports would have been expected to increase in coming months and years as new US projects come onstream. If the tariffs are implemented, global producers and portfolio players may have to arrange swaps and optimize positions to supply China from other countries, and there could be a blow to investor confidence in new US trains. Already in the short-term market some buyers looking for cargoes to China were reportedly wary of arranging deals from the US.
Amid much industry debate over the future of long-term supply contracts, however, Taiwanese buyer CPC showed they still had life by agreeing a 25 year deal with US Cheniere for 2 mtpa of supply from 2021 onwards, though at prices linked to the US Henry Hub rather than oil.
While US/China flows were under threat, US deliveries to Europe were promised a boost after a 25 July summit between European Union President Jean-Claude Juncker and US President Donald Trump. “They will be buying vast amounts of LNG!” tweeted the US leader, while Juncker said the EU was going to build more terminals to import US gas.
Industry sources questioned how the politicians could influence what would ultimately be commercial decisions by private companies, and pointed out that Europe already has sufficient unused regasification capacity to significantly boost imports without building new terminals. The European Commission later announced that senior trade officials would hold follow-up meetings in Washington DC on 20 August.
LNG Analyst, Global, ICIS
Alex Froley follows the global LNG markets as an analyst at energy markets information provider ICIS. As well as following the latest market trends in pricing and trade flows, he is working on the development of new features for the company’s analytics platform LNG Edge.
Alex has over fifteen years’ experience in the wholesale energy markets, with a particular focus on European gas and electricity trading and the rapidly-expanding market for spot LNG. He has worked as a price reporter assessing markets including the UK NBP and Dutch TTF gas markets, the German electricity market and Asian LNG and has been responsible for real-time news, daily and fortnightly publications about the natural gas industry. He has also worked as a European gas analyst tracking supply and demand data for gas flows across Europe.
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