US LNG exporters could face headwinds in 2019 as potentially weaker demand from Asia meets a looming expansion in US liquefaction capacity, keeping the export market under pressure.
With winter prices in Northeast Asia’s premium market now lingering below $10/MMBtu, this year’s peak-demand season is already raising alarms for exporters.
In recent winters, the Platts JKM has experienced its strongest prices of the year from December to February. Last year, the index averaged $10.35/MMBtu over the three-month period.
This year, though, a combination of factors has conspired to keep winter prices lower. Market participants and analysts alike are expecting that trend to continue well into 2019.
Beyond the winter months, JKM swaps markets are now pricing second-quarter cargoes in the low-$8s/MMBtu, and third-quarter supply in the upper-$7s/MMBtu.
In the prompt market, mild weather in Northeast Asia is to blame, at least in part, for weaker prices. In Japan, warmer temperatures last month cut imports by 12% compared to November 2017, according to import data compiled by S&P Global Platts Analytics.
In China, early season procurement efforts have pushed storage levels to comfortable levels, driving some end-users to defer deliveries while others have opted instead to resell their cargoes.
A longer-term trend could already be at work, though.
In Japan, the recent restart of Shikoku Electric Power Company’s 890-MW Ikata-3 reactor in late October marks the fifth nuclear reactor to be restarted this year alone.
In 2019, Kansai Electric Power Co. has targeted the Takahama No. 1 and Takahama No. 2 reactors for restart. Another four nuclear reactors separately owned by Kansai Electric, Tokyo Electric Power Co. and Japan Atomic Power Co. have already been approved for restart by Japan’s Nuclear Regulatory Agency.
According to Platts Analytics, those restarts will result in a measureable cut to LNG demand from Japan, with continued demand growth from China now expected to keep Northeast Asian demand roughly flat, at best.
Further dampening the outlook for US exports to Asia are LNG-chartering rates that recently hit record highs in both the Atlantic and Asia Pacific basins.
For a US Gulf Coast exporter, those rates equate to a shipping cost at nearly $2.60/MMBtu to Japan/Korea and about $3.10/MMBtu to South China or Taiwan.
In combination with elevated US onshore gas prices, which have only recently fallen back below $4/MMBtu, the margin on US exports to Asia has narrowed significantly in recent weeks.
According to Platts Analytics, the profit margin on a US cargo shipped to the JKM market now stands at less than $2/MMBtu, including the cost of feedstock gas, onshore transport, freight and shipping fees. US CAPACITY
Just as Northeast Asia’s appetite for LNG cools, and the shipping market tightens, US exporters are now facing a steep ramp-up in competition from export projects cropping up along US shores.
Already this December, liquefaction activity at Cheniere Energy’s Corpus Christi LNG export terminal has begun, with production from the company’s Sabine Pass Train 5 likely to follow by early next year.
According to a Platts Analytics forecast, the Corpus Christ terminal should have its second train operational by August. At Cameron LNG, Train 1 should be online by April, followed by Train 2 in October. Freeport LNG is expected to have its first train operational by late third quarter.
Including demand from the small-scale Elba Island terminal in Georgia, US feedgas consumption is expected to grow by 4 Bcf/d in 2019 as US exporters begin to compete in earnest for export market share, shipping capacity and access to the increasingly transited Panama Canal.
Tightening competition and potentially narrower margins in 2019 could keep US LNG exports closer to home as offtakers target markets within the Atlantic Basin.
According to Platts Analytics, US exports are more likely to target Europe’s continental gas markets next year, including the British NBP and Dutch TTF — but those efforts could face headwinds, too.
Europe’s LNG hubs are already discounted to onshore gas as a growing number of Atlantic Basin exporters look to offload supply that’s too costly to ship to Asia. In November, LNG regas rates in continental Europe climbed to their highest for a calendar-month period since January 2010.
While importers in Northwest Europe’s two busiest gas markets are widely known for their cargo reloads, it appears that more of those volumes are staying in Europe for now. In November, the total volume regasified surpassed 191 Bcf, which was up 64% on the year, according to data compiled by S&P Global Platts Analytics.