Article by Guy Broggi, LNG Market Expert. The views expressed are the author’s own, and do not reflect any position on behalf of his company.
There will be new LNG quantities touching the markets in 2016, for sure…
(This is part one of a two-part article) - If everything goes as planned new quantities of LNG will have to find their way from newly built liquefaction plants in the US and Australia as well as from existing plants like Angola LNG, returning to production after a long period of inactivity. No mention here of Yemen LNG for which a political settlement in Yemen is a pre-requisite for a return to market.
Among these new quantities, a solid percentage has already been committed to buyers under long-term contracts, especially from Australia where sellers had signed contracts before taking their Final Investment Decisions (FID), some years ago. During the ramp-up period, however, unsold cargoes will be offered through “tenders” by the plant owners, while traditional producers in South-East Asia like Indonesia will have to sell available quantities resulting from the termination of historic contracts.
The real question in everybody’s mind relates to the “flexible” quantities that are still to be bought by final customers- the end-users: How much? From whom? From where? And at what price? These are typical “traders’ questions” that many analysts would like to shed light on. This is of course “mission impossible” due to the increasing number of market players, the new trend of buyers to become “aggregators” and the secrecy surrounding existing sales contracts as well as actual tenders’ results. (The only public data refers to the US export FOB prices and volumes; the rest remains largely based on conjectures and scouting results).
The traditional “security of demand” that public utilities in Europe and Japan, Korea, Taiwan (JKT) used to provide sellers with (by signing long-term commitments on volumes) has disappeared in Europe and is fading in Asia, thus imposing the markets a new paradigm: flexibility, flexibility and flexibility. In China, the three big importing NOCs, which have been successful in building receiving terminals- and signing long-term contracts as the law imposed them to do- are now confronted with the reality of fragmented end-users’ markets… and government-fixed domestic prices.
In each market segment, the level of natural gas price is the main parameter that makes prognosis difficult. In Europe as well as in JKT, some long-term LNG or pipeline gas contracts are still in place for historic importers- with a link to crude oil prices - while their new competitors can subscribe quantities priced at “hub prices”, the real reference to LNG “spot” sales. According to the latest Brent futures, for an average price of $40/bbl in 2016, “spot” LNG will have to fetch less than $5/MBtu in Europe and $6/MBtu in Asia to be attractive, which is roughly $1 less than today’s spot prices market indicators for Q1-2016 (NBP and JKM respectively).
And the final buyers for “flexible” LNG in 2016 are…
Europe - through its terminal capacity holders - remains a possible destination for US LNG in 2016 (look at recent deals announced by Cheniere); but it is not the only destination for “flexible” LNG.
2016 will be a year with a lot of creative initiatives meant to adjust the constraints sellers and buyers have to live with - their contractual arrangements - to the reality of end-users’ appetite. This new “marketing” trend is well established now: shorter term deals with flexible terms allowing re-directions to new end-users in need for quantities. We might well witness an increased role for “tenders” (initiated from “short” buyers and “long” sellers) where “portfolio players” will take a greater role to absorb new risks.
Thanks to newly equipped buyers in Jordan, Egypt and Pakistan as well as in Lithuania and Poland, the supply-demand equilibrium should be easier to achieve through “tenders” - although we may still witness the necessity for re-loadings, re-negotiations of long-term contracts when contractual prices diverge too much from either pipeline gas in Baltic Europe or “spot” LNG availability elsewhere. (Look at the recent negotiations between Qatar and India or Lithuania with Statoil).
Continue reading Guy Broggi’s article: View part 2.
Guy Broggi is an Executive Advisory Board Member of the 2016 EAGC conference which will take place in The Hague in November 2016.
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