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US LNG shutdowns likely in future — BP

11 Jul 2017 17:33 (+01:00 GMT)
US LNG shutdowns likely in future — BP

Executive says capacity will have to come off line to balance the market, although shutdowns are unlikely to be frequent

Houston, 11 July (Argus) — Some US gas liquefaction capacity is likely to be temporarily taken off line before the end of the decade in a bid to balance an oversupplied global LNG market, a BP executive tells 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 last month's CWC's LNG Americas Summit in Houston. One advantage of US LNG is that customers have the option to not take LNG if they do not want it, leading to the possibility that US liquefaction trains could sometimes shut when global LNG prices are low.

Shutdowns would be likely to start in 2018 or 2019, when the supply glut is expected to widen, Straughan said. New liquefaction capacity being built in the US and Australia will outstrip global demand growth through to 2020, he added. 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 ft³/d (17mn m³/d) of gas, at the Freeport LNG terminal that is being built in Texas. BP's capacity would come from Freeport's second train, expected to start operating in early 2019.

Shutdowns are unlikely to 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 could be as low as 20¢/mm Btu if shippers that own parts of the value chain have long-term contracts for such assets, Straughan said.

Officials from Cheniere Energy say US LNG could be exported to Europe even if prices are lower than Henry Hub prices, citing the advantage of having destination flexibility for LNG deliveries from the US, as well as the 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 says.

Premium points

Some traders say European prices need a premium of about $2/mn Btu to Henry Hub to draw 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 added. So although market prices might suggest US LNG exports to Europe are uneconomic, for some firms exporting allows them to reduce the losses that they would otherwise incur by not exporting at all.

The major sunk cost for US LNG customers is the take-or-pay fee that they pay for liquefaction capacity. US LNG customers have to pay that fee, currently $2.25-3.50/mn Btu, whether they take LNG or not. If they want LNG, they would also pay for gas at roughly the domestic spot gas rate, plus pipeline transportation. Variable costs could include a 15pc surcharge over Henry Hub prices that Cheniere charges customers, along with shipping, regasification capacity and pipeline transportation.

The UK's NBP is currently at a premium of around $1.70/mn Btuto Henry Hub, while Argus assesses the freight cost from the US Gulf coast to the UK at around $0.40/mn Btu.