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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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U.S. LNG Industry Needs Prices To Double

Last week, Tellurian said it would make the final investment decision on the Driftwood LNG project next year. On the one hand, the news is good: Tellurian had stopped making updates on the project after its long-term supply deal with India’s Petronet fell through. On the other hand, the announcement makes it the latest in a string of LNG companies pushing their FIDs back by a year, and this does not bode well for the industry. It is enough to look at the reason why Tellurian postponed its final investment decision, as explained by the chief executive: the company needs gas prices--specifically, Asian spot market prices--to be over $5 per million British thermal units (mmBtu). Right now, LNG trades at about $2 per mmBtu. Can it climb more than 100 percent within a year?

According to Shell, prices will rise by next year because new supply will be slow in coming this year. But that forecast was made in the supermajor’s LNG Outlook 2020, which was released in February. Since then, Shell has pulled out of the Lake Charles LNG project and is reportedly mulling over the sale of a stake in its Australian LNG business. While the latter is likely part of a divestment program running from before the crisis, the exit from the Lake Charles project is interesting, especially in light of the company’s continued optimism about the LNG market.

The company cited market conditions in its decision to pull out from Lake Charles LNG. India’s Petronet must have had the same market conditions in mind when it let its preliminary long-term agreement with Tellurian expire. Right now, LNG is much cheaper on the spot market than in long-term supply contracts. It is this price disparity that is changing timelines and pushing back FID dates. And ironically enough, it is U.S. LNG producers that contributed to this situation, though not willingly.

LNG has not been spared by the coronavirus. Demand for the so-called bridge fuel also slumped when the national lockdowns began. Pressed for buyers in a situation of oversupply that was only going to get worse, U.S. producers had to dump their product on the spot market. No wonder then that LNG spot prices, which have been on a persistent slide since April, reached an all-time low of $1.85 per million British thermal units at the end of May. 

The International Energy Agency earlier this month published a new report on gas and LNG in which it said that “natural gas is expected to experience its largest demand shock on record in 2020 as the Covid-19 pandemic hits an already weakened market.” 

This shock will cause a 4-percent drop in global gas demand. The IEA said the lost demand would start returning next year, but it added that the shock will still lead to lost demand of some 75 billion cu m of natural gas in the period to 2025.

Related: China’s Oil Imports From Saudi Arabia Jump To Record High

“Liquefied natural gas is expected to remain the main driver behind global gas trade growth, but it faces the risk of prolonged overcapacity as the build-up in new export capacity from past investment decisions outpaces slower than expected demand growth.”

Remember all those forecasts that said new LNG production capacity was not coming fast enough to satisfy growing demand? Those forecasts are proving worthless, at least for the medium term. But things look uncertain for the long term as well. Because while it’s good to rule the spot market, it’s long-term supply contracts that U.S. LNG producers need.

GlobalData earlier this month warned that after Tellurian—and Sempra Energy, and Pieridae Energy before it—more LNG hopefuls may delay their final investment decisions.

“Due to a sharp fall in oil prices, spreads between oil-indexed long-term LNG contracts and spot contracts have reduced considerably,” GlobalData analyst Haseeb Ahmed said, as quoted by LNG Industry. “As a result, LNG producers might struggle to leverage higher value long-term contracts for weaker spot prices that can keep their revenues up. As uncertainty still looms large, several companies in North America may rethink their spends on upcoming multibillion-dollar gas projects and delay final investment decisions (FIDs).”

And the long-term prospects? These are not particularly good, according to GlobalData, again because of that now apparently chronic discrepancy between supply and demand.

“While the short-term impact of the current crisis on North American LNG sector may result in limiting LNG production or uncertainty over new investments, the long-term impact can be supply overhang that can make it difficult for North American producers to remain cost competitive,” Ahmed said.

This means some final investment decisions may never be made, and some plans for new LNG export capacity may never reach the FID stage.

A recent outlook for the LNG industry projected that the United States will add the largest share of new LNG export capacity over the next five years, at 145.1 million tons per year, followed by Russia and Mexico. But that may never happen if prices don’t rise sharply and strongly. With analysts predicting LNG fundamentals to only begin to recover in mid-2021, the chances of a sharp, substantial rise in prices are slim.

By Irina Slav for Oilprice.com

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  • James Hilden-Minton on June 29 2020 said:
    Tellurian needs a $5/MMBtu long-term commitment. But this is unlikely to materialize. Solar and wind are quite competitive below these prices. It is a big problem that LNG is now a global market, because this means LNG is now competing with the lowest prices of solar and wind anywhere on the planet. Gas analysts seem to be ignoring this competitive challenge. It basically implies a cap on long-term contract pricing. LNG may need to find some niche markets away from competition with the cheapest wind and solar, and for these safe markets there may already be too much LNG capacity. Reporters should be asking who are these buyers that need to lock in LNG at $5/MMBtu.

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