Cheniere expects no LNG winter cancellations

US LNG producer Cheniere expects its customers to lift their contractual volumes in full this winter as the market recovers from the effects of the Covid-19 outbreak.

The firm expects a recovery in global LNG demand, particularly in Asia, to continue throughout the rest of the year and further support regional price spreads, providing no incentive for US offtakers to cancel any of their contractual volumes during the winter. "We think our customers will be lifting during the winter, it's economic to be lifting," the firm's senior vice-president and chief financial officer Zach Davis said.

Asian LNG demand was broadly flat in April-June compared with a year earlier, mostly as lower demand from Japan and South Korea was offset by stronger Chinese demand, the firm's executive vice-president and chief commercial officer Anatol Feygin said. Going forward, Chinese demand is expected to grow further as the country's economy shows signs of strong recovery, with its purchasing managers' index (PMI) seen "in expansion mode" for the past four months, he added. The firm also expects Japanese and South Korean demand to recover in the coming months, as a result of lower retail prices in South Korea and with some Japanese nuclear capacity expected to be off line.

A substantial portion of US cargoes has been cancelled by long-term offtakers in recent months, as LNG delivered prices across the world fell below the cost of feedgas at US facilities, or held too tight a premium to that level for firms to be able to deliver those cargoes at a profit. Cheniere — which operates around half of the US' total liquefaction capacity — exported 78 cargoes in April-June, down from 104 cargoes a year earlier and as many as 128 cargoes in the first quarter of this year. Exports totalled 274 trillion Btu, suggesting an average cargo size of 3.51 trillion Btu, down from 361 trillion Btu a year earlier and 453 trillion Btu in the first quarter of 2020.

About half of the 50 cargoes not produced in the second quarter may have been turned down by long-term offtakers. Cancellation revenues totalled about $300mn in the second quarter, already including $50mn of third-quarter cancellations. The average revenue is $10mn for each cargo cancelled, Feygin said, suggesting about 30 cargoes were cancelled by long-term offtakers, already accounting for five that were expected for loading in July-September.

The firm's long-term supply obligations grew during the second quarter with a number of long-term contracts from the second liquefaction train at the Corpus Christi facility starting in May. These include contracts with Pertamina, Naturgy, Woodside, Iberdrola and EDF. These firms have long-term supply agreements with Cheniere for an aggregate volume of approximately 5.4mn t/yr.

Cheniere uses excess production at its facilities to meet the supply obligations of its trading arm. The firm likely replaced most of the cargoes it did not produce with third-party purchases, which totalled 34 trillion Btu — or approximately 10 cargoes — in the second quarter, up from 14 trillion Btu in January-March. The firm was only heard to have issued one purchase tender for six summer cargoes in March, suggesting most of its third-party purchases were concluded bilaterally or by bidding for cargoes tendered by other suppliers.

This supply response "is what we were designed to handle, and we took advantage of opportunities from facilities that were not as equipped to handle [such market conditions]", the firm's chief executive Jack Fusco said. "We were able to secure cheap cargoes" to meet customers' requirements, he added. The firm's margin per mn Btu increased in recent months as the firm sold less spot LNG, which typically has lower margins than volumes sold under long-term contracts.

Global supply growth slowed this year, as a result of fewer capacity additions and as global liquefaction capacity adjusted to the impact of the Covid-19 outbreak on demand, Feygin said. Global supply shrank by approximately 1mn t in the second quarter, ending a string of six consecutive quarters in which global supply grew on average by 10mn t each quarter, he added.

But the firm considers the medium and long-term fundamentals of the LNG market to have actually improved, a view again centred on China as the key driver of global demand in the coming years. The 20pc growth in the country's LNG demand seen in the second quarter, driven by economic recovery and a supply switch from pipeline gas to LNG, is "just the start", Feygin said, although he conceded that the ample commercial opportunities are counterbalanced by geopolitical headwinds.

Cheniere is building a third liquefaction train at the Corpus Christi facility, which is 90pc complete and on course to be commissioned in the first half of next year, as well as a sixth liquefaction train at the Sabine Pass facility, which is 64pc complete and is expected to be commissioned in the second half of 2022, ahead of the previously planned start in the first half of 2023.

By Antonio Peciccia