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Some US LNG shutdowns likely in future: BP exec

22 Jun 2017 18:44 (+01:00 GMT)
Some US LNG shutdowns likely in future: BP exec

Houston, 22 June (Argus) — Some US natural gas liquefaction capacity likely will be temporarily shut before the end of the decade to try to balance an oversupplied global LNG market, a BP executive told Argus.

"It's very hard to say if capacity will shut down, but, based on what we know, I don't see how else the market clears," BP chief commercial officer Jimmy Straughan said on the sidelines of CWC's LNG Americas Summit in Houston.

One of the advantages of US LNG is that customers have the option to not take LNG if they don't want it, leading to the possibility that US liquefaction trains would sometimes be shut when global LNG prices are low.

Shutdowns most likely would start in 2018 or 2019, when the current supply glut is expected to widen, Straughan said. New liquefaction capacity being built in the US and Australia will outstrip global demand growth through 2020, he said. The global market is expected to balance in the mid-2020s with increased demand.

BP has a 20-year contract for liquefaction capacity of 4.4mn t/yr, equivalent to about 600mn cf/d (17mn cu m/d) of gas, from the Freeport LNG terminal being built in Texas. BP's capacity would come from train 2, expected to start operating in early 2019.

Shutdowns likely would not be frequent because European gas prices only need to be slightly higher than US Henry Hub prices for US LNG to head to Europe, widely seen as the market of last resort. The required premium would depend on a number of factors, but it could be as low as 20 cents/mmBtu if shippers that own various parts of the value chain have long-term contracts for such assets, he said.

Officials from Cheniere Energy have said it is possible US LNG could be exported even if European gas prices are lower than Henry Hub prices, because of the advantage of having destination flexibility from US LNG and potential logistical problems of turning off US liquefaction capacity. Cheniere's Sabine Pass LNG terminal in Louisiana started exporting in February 2016 and its Corpus Christi LNG facility in Texas is expected to come on line in 2018 or 2019.

"It would be very difficult to shut and reopen liquefaction trains if prices move quickly because of storage," Cheniere chief commercial officer Anatol Feygin said.

Some traders have said European gas prices need a premium of about $2/mmBtu to the Henry Hub to attract US LNG. Straughan said such projections assume US LNG customers would need to acquire various infrastructure on the spot market, including shipping, European regasification capacity and European pipeline capacity.

A number of US LNG customers are major global traders that own or have long-term contracts for such infrastructure and can treat them as sunk costs, he said.

US LNG customers will only need to recover their variable costs to export their US supplies, even if they lose money by not covering their sunk costs, Straughan said, offsetting some of their losses.

The major sunk cost for US LNG customers is the take-or-pay fee for liquefaction capacity. US LNG customers have to pay that fee, currently ranging from $2.25-$3.50/mmBtu, whether they take LNG or not. If they want LNG, they additionally would pay for gas at roughly domestic spot gas prices and pipeline transportation.

Variable costs could include a 15pc surcharge over Henry Hub prices that Cheniere Energy charges its customers, shipping, regasification capacity and pipeline transportation.

Argus yesterday assessed the spot charter rate from the US Gulf coast to the UK at 52¢/mmBtu. The UK's National Balancing Point now has about a $1.60/mmBtu premium to the Henry Hub.

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