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Ramp-up of new U.S. liquefaction facilities in a dynamic market

Jul 15, 2019
5 min read
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By: Ben Chu, Director of Equity, LNG & Proprietary at Genscape and Charlie Cone, Proprietary Analyst at Genscape

Fluidity is the future of gas markets as the rise in global connectivity and export capacity transforms the gas landscape. North American LNG is helping drive that fluidity as U.S. molecules are transported to more countries than ever before.

Simultaneously, there is significant volatility involved in these burgeoning markets as price swings, maintenance turnaround, and varying demand could cause LNG markets to adjust in new ways. Such events could be especially impactful going forward as U.S. liquefaction supply is scheduled to approach 7.8 Bcf/d by the end of summer, just as Gastech 2019 gets underway.

Global LNG Supply growth
In a recent example, volatility materialised as JKM and NBP markers collapsed in early summer. Our anticipation for bloated European storage came to fruition, driven by global LNG supply growth from U.S., Russia, & Australia, as well as a reduction in Japanese LNG demand due to nuclear restarts. Aggregate European gas storage inventory ended the winter of 2018-19 at multi-year highs and inventory is tracking at elevated levels. The U.S. export arb to Europe narrowed dramatically during May, and Asian spot prices dropped below 5 per million British thermal units (MMBtu) in late May as sellers made their presence known in the market. New questions arise, such as how the imminently operational LNG terminals in the Gulf of Mexico will respond to such market pressures.  

To help address questions like this, Genscape tracks and monitors all liquefaction terminals in North America. Our data currently shows that Cameron LNG, Corpus Christi Train 2, and Freeport LNG are ramping up in-line with end-of-summer service expectations.

Cameron LNG started liquefaction operations in May and has shipped one commissioning cargo to France. Corpus Christi Train 2 produced LNG in mid-June, while Freeport LNG shows testing activity in our measurement of electricity usage, presumably still targeting end of July to load its first cargo. As substantial completion milestones are reached, the majority volumes produced at each of these sites (about 85 to 90 per cent) will be secured on a long-term basis as Free-on-Board contracts and Liquefaction Tolling Agreements commence. It is important to note that most of these contracts include suspension clauses that allow buyers to flex down on allotted capacity. That said, contracted LNG drives consistency in the market often serving baseload demand, and lends some support to the idea that a market soft patch would not impede startup of new capacity this summer.

Emerging Markets
Demand is still strong and growing in many parts of the globe, absorbing some cargoes displaced from Asian and European markets. For instance, Mexico has proven to be an important sink for U.S. LNG producers, as Mexican state-owned utility, Comisión Federal de Electricidad (CFE) ordered more cargoes in lieu of delayed pipelines bringing gas from Texas. Along with Mexico, smaller emerging markets are beginning to compensate for dramatic drops in European imports and stagnating demand in Asia. Chile, Brazil, Ecuador, Greece, United Arab Emirates, Taiwan, and Singapore imported a total of 14 cargoes since the beginning of May, but out of those countries, only Chile and Brazil collected one LNG cargo each from the U.S. this time last year. In our view, these growing, emerging markets will prove invaluable in providing a more diverse customer portfolio for LNG suppliers.  

However, Genscape data has shown signs of near-term slack in the market. Our maritime AIS antenna network saw two unladen LNG tankers with listed destinations believed to represent Cameron LNG circling the Gulf of Mexico during the first two weeks of June without showing any signs of heading to port. Such events raised questions about finding buyers for these commissioning cargoes in the midst of a reduction in observed feed-gas, especially considering that Cameron had plenty of LNG in storage based on our daily inventory model.  

New Pipelines
In this next year, new pipeline infrastructure around the world will further add to the dynamics. The delayed Waha-to-Guadalahara and Sur-de-Texas to Tuxpan pipelines that led to continued Mexican summer LNG demand will eventually come online. In the Pacific, Gazprom’s Power of Siberia pipeline will soon feed the seemingly insatiable long-term Chinese demand. Across the Atlantic, Nord Stream 2 is expected to come online by end of the year despite U.S. objections, which will allow more Russian gas to be transported into European markets in competition with U.S. LNG. Despite these dynamics, the latest wave of U.S. export capacity is ramping up as expected with an additional ~2.5 Bcf/d of takeaway scheduled to come online by the end of the summer.

Outlook
One thing seems certain, the coming year promises to be dynamic for many aspects of LNG as new suppliers and buyers alike enter an ever-more interconnected market.

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