Rush to reach FID before market turns

Monday, 04 February 2019
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2019 could be a ‘year of incongruity’, as developers are rushing to reach financial close on an array of LNG export projects despite a backdrop of a market tipping into oversupply. North America leads the next wave of global LNG project sanctions in 2019, with three US Gulf Coast developments – Sabine Pass Train 6, Golden Pass and Calcasieu Pass – expected to reach FID before the summer. 

At least two other Gulf Coast projects – Freeport Train 4 and possibly Driftwood LNG – are also “not far behind,” Wood Mackenzie expects.

Less than one-third of the current wave of U.S. LNG export projects has stated up, leaving the lion’s share of new supply to flood the market over the next two years. But the current oversupply could turn around quite rapidly in 2022, when LNG demand growth is likely to outpace sanctioned supply.

For now, the build-out of three U.S. Gulf Coast LNG facilities with up to 30 mmtpa of capacity combined boosts capital spending in the region. Up to US$20 billion could be invested in the three projects over the next four years.

"While the Gulf Coast remains the key growth region for North America LNG, projects in Canada and Mexico are also progressing and attracting interest," said Alex Munton, Wood Mac’s principal analyst. "Additional west Canadian capacity could help further open Canadian supply to global markets, and we are now seeing momentum around Mexico as an alternative export route for US production."

Canada's Woodfibre LNG could reach FID in 2019, contingent on the execution of an engineering, procurement and construction (EPC) contract. Mexico's Costa Azul Phase 1 LNG export terminal still needs to finalise an EPC contract, binding offtake agreements, permitting and financing arrangements. But, progress is being made, so analysts say it too could reach FID in 2019.

JKM-TTF spread narrows

Analysts at Energy Aspects, meanwhile, expect four new LNG Trains to start up or ramp up in Q1-2019 and – considering the current mild Asian winter – this leaves some 5.7 Bcm y/y of incremental supply available for the European market that quarter.

Mild weather in north-east Asia gives little incentive for buying and some big importers, notably China, have already purchased cargoes over the summer for winter 2018/19. With JKM (Japan Korea Marker) prices falling, the JKM-TTF spread for Mar-19 has narrowed from $1.35/mmbtu down to less than $0.9/mmBtu in late January.

An overarching bearish feeling in global gas markets is exacerbated by the weakness in oil prices. Fearnleys lowered tanker rates last week to $100,000 per day, down from $135,000 per day in mid-December.

“Still, many developers are in a rush to sanction their LNG projects to secure attractive offtake contracts before global gas markets shift into oversupply,” analysts led by Trevor Sikorski said, suggesting that “given that influx of new supplies on the horizon, northwest Europe could become the market of last resort for excess LNG once again.”

ExxonMobil’s Rovuma LNG project in Mozambique is set to be one of the first projects sanctioned this year, and the BP-led 2.5 mtpa Torque LNG project already took FID in mid-December. Additional supply in Q1-2019 will also come from Cheniere’s 4.5 mtpa Sabine Pass Train 5 and Shell’s 3.5 mtpa Prelude project in Western Australia. The maiden cargo from Prelude is likely to set sail in the next four to eight weeks.

Mind the ‘timing risk’

Demand-side risk is accumulating as the 2019 U.S. gas injection season begins, notably over the timing of new LNG projects and pipeline exports to Mexico.

Cameron LNG Train-1, in particular, faces some "timing risk,” Sikorski cautioned. Sempra Energy has said the 4 mtpa train will have a Q1-19 in-service date, but analysts cautioned “the fact that Cameron LNG only received approval to commission its flare on 3 January and has not yet even filed for feed-gas introduction points to delays into Q2 19.”

Kinder Morgan’s 10 mini-trains at Elba Island in Georgia likewise face headwinds regarding start-up. “The first train was scheduled to take feedgas in Q1-19,” but analysts warn it “will likely face delays after returning its compressor to the manufacturer for corrosion repairs in late December.”

Corpus Christi Train-2, which was approved to introduce fuel gas on 3 January, has been given a better verdict. Energy Aspects says it “should be on track to take feedgas in late Q1-19 or early Q2-19.”

For summer 2019, a plethora of projects are expected to add LNG volumes in an already long global market such as the 4.2 mtpa Ichthys Train-1 in Australia, the 4.5 mtpa Corpus Christi Train-2, the 1.3 mtpa Elba Island Train1-5, and the 4.4 mtpa Freeport Train-1.

With more and more U.S. LNG export ventures are starting up, or ramping up capacity, much of the rise in gas production in North America is destined for export. The U.S. Energy Information Administration (EIA) expects American LNG exports will increase from an estimated 3.0 Bcf/d in 2018, rising to 5.1 Bcf/d in 2019 and further up to 6.8 Bcf/d in 2020 – more than double 2018 levels.

U.S. shale gale continues

On the supply side, production is still going strong as the U.S. shale gas output keeps increasing. The EIA expects record-high dry U.S. natural gas production will keep growing through to 2020, from an estimated 83.3 billion cubic feet per day (Bcf/d) in 2018 to 90.2 Bcf/d in 2019 and 92.2 Bcf/d in 2020.

Most of gas production will come from the Appalachian Basin in the U.S. Northeast, followed by the Permian Basin in western Texas and eastern New Mexico and the Haynesville shale formation in eastern Texas. The supply growth is underpinned by improved drilling efficiency, falling costs, faster well completions, and increased takeaway capacity from the highly productive Appalachia and Permian production regions.

But not all is rosy when it comes to U.S. upstream companies: Fracking-focussed companies in the U.S. are struggling to generate consistent free cash flows, even with soaring production and higher oil prices. Rising output does not necessarily go hand in hand with financial success, which raises questions over the long-term sustainability of the North American shale gas revolution. 

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