The aftershocks from the oil price crash continue to be felt in energy markets around the globe.
The latest victim is the Asian liquefied natural gas (LNG) market.
Heavy Asian demand for LNG sent the price soaring to near $20 per million British thermal units (Btu) last March. But, just one year later, spot LNG prices in Asia have plummeted to about $7 per million Btu.
The catalyst for the LNG crash is oil, but the reasons are twofold…
The first reason was explained in an article by my colleague, Karim Rahemtulla. You see, in many parts of the globe, oil can be directly substituted for LNG as an energy source. Accordingly, as oil gets cheaper, the more viable a substitute it becomes.
The second reason has to do with the structure of the market.
Going Down With the Ship
In Asia, most LNG is traded through long-term contracts. These LNG contracts are based on the price of oil, not natural gas. And the contracts operate on a time lag of three to six months. That means, not all of oil’s 50% price plunge has been factored into some Asian LNG contracts yet.
Consultancy Energy Aspects Ltd. told Bloomberg that average LNG contract prices in Asia will drop another 30% to 35% in 2015, staying below $10 per million Btu.
That sentiment is echoed by Fitch Ratings, which also expects the average Asian LNG contract price to be below $10 per million Btu later in 2015. The average is currently about $14.
The expected drop in price is bad news for all of those planned LNG projects around the globe that were counting on rising Asian demand.
Fitch specifically pointed that the $10 price is below the break-even prices for Australian LNG projects. Those are forecast to be in the $11 to $13 per million Btu range.
Canada’s plans to turn its West Coast into an LNG export hub to Asia is also under pressure from the drop in prices.
Domestically, the oil price slump has already claimed its first victim…
The planned 8-million-ton-per-year Excelerate Energy LNG terminal in Texas has been put on hold until later this year, when the project will be reassessed. The terminal was scheduled to begin LNG exports in 2018.
If oil stays at depressed price levels, that doesn’t bode well for some other planned LNG projects in the United States.
According to Reuters, in the crosshairs of oil and LNG are 13 other projects that have yet to gather enough overseas buyers to reach the final investment decision (FID) stage. Companies normally want to have signed contracts for at least 85% of the planned LNG capacity before giving the nod to a FID.
Examples of projects that have already reached that stage (and that will proceed) are Cheniere Energy’s (LNG) Sabine Pass Project in Texas and the Cameron LNG Project in Louisiana. Cameron is controlled by Sempra Energy (SRE) and its foreign partners, GDF SUEZ S.A. (GDFZY), Mitsui (MITSY), Mitsubishi (MSBHY), and Nippon Yusen Kabushiki Kaisha (NPNYY).
Hope for the Future
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There still is some hope for those projects that have yet to sign up enough customers.
You see, as with oil, cheaper prices stimulate more demand. In other words, what cures low prices is low prices. Even Europe is using more LNG, as it is benefiting from cheaper Russian-supplied natural gas.
But the real action is in China, India, and Southeast Asia. It’s these areas that will be the drivers of demand, according to Bloomberg New Energy Finance.
For example, BNEF forecasts that low LNG prices will raise India’s demand in 2015 by 7% to 15 million metric tons. It adds that Indian demand for LNG should rise to 38 million metric tons by 2020.
The key to U.S. LNG projects’ survival is signing customers from places like India to long-term contracts.
Of course, U.S. government red tape remains a sticking point. India doesn’t have a free trade agreement (FTA) with the United States and must, therefore, request project-specific exemptions from the government. Currently, the United States only permits LNG exports to countries with an FTA.
Even if the government gets out of the way, these projects are unlikely to enjoy the juicy returns they once expected before oil crashed.
And the chase continues,