THE CRISIS

LNG prices have collapsed over the past couple of months due to concerns of oversupply and weaker-than-expected demand. This situation has been exacerbated by the coronavirus outbreak, which has further dampened global demand, pressuring prices below $2/MMBtu.

Many Asian LNG buyers have attempted to call force majeure on their term, mainly oil linked, LNG contracts; however, as demand reductions do not typically constitute a force majeure scenario, many of the cargoes are instead likely to be deferred or rescheduled. Furthermore, given the time lag in the pricing mechanism of these contracts the full decline in oil prices probably hasn’t fully “priced in” making term LNG significantly more expensive than spot LNG.

This fundamental situation has pressured global gas prices, except US gas prices. Henry Hub has risen 10% over the past month due to concerns that shale producers will curb production and as such reduce the gas by-product.

Moreover, the recent rise in Henry Hub prices amid record low LNG prices, has resulted in US LNG being the most expensive LNG on the spot market.

Despite some US LNG cargoes heading to China following Beijing waiving the 25% tax on US LNG for some buyers, last week it was reported that at least 21 buyers have cancelled May and June loading cargoes. In fact, this optionality is inherent in most US LNG contracts as buyers could cancel loadings and pay the liquefaction fee.

US LNG producers are now facing the conundrum of whether to carry on producing or to “shut in” if the projects cannot cover their variable costs.

THE OPPORTUNITY

In every crisis there are always opportunities. As buyers and producers mull over what to do with US LNG, for other market participants there may be an opportunity to develop new markets to sell into, which could provide more optionality and flexibility. These new markets indeed will require a new approach. In this environment, new builds are not viable; however, companies with existing underutilized assets, such as Floating Storage and Regasification Units (FSRUs), may be able to assist.

At the Solomon Peter Group, we work with clients in Latin America, the Caribbean and Africa who are extremely price sensitive, with affordability ranging between $3 – 5/MMBtu, some higher. This price variation is driven by the competing fuels in each market; in some markets LNG will compete with domestic gas, whereas in others LNG will compete diesel and oil products.

THE SOLUTION

The main barrier to entry for these buyers is import infrastructure. Although existing onshore infrastructure such as a jetty, maybe available, the exact onshore infrastructure requirements will need to be determined once the import solution is identified.

Accordingly, from our buyer engagements we are certain that LNG prices at this level are attractive for some of the buyers that we work with. However, they will require flexibility. Flexibility in terms of duration, charter rate, payment terms and send out capacity.

To discuss the possibilities, we are inviting FSRU solution providers and LNG suppliers with existing assets to engage with us. If this opportunity is of interest, email us at [email protected], drop me a private message on LinkedIn and Follow Solomon Peter on LinkedIn