European LNG import capacity

Recent dynamics driving unseasonably high JKM and TTF pricing, ranging from elevated carbon pricing and LNG outages creating supply disturbance in Asia, have further illustrated the emerging global links driving natural gas pricing.

Beyond these current dynamics, European and US storage exit winter at lower levels than recent years, but what does robust US production, low pricing, record US feedgas and elevated TTF levels mean for global gas prices heading into summer?

Ira Joseph, S&P Global Platts head of generating fuels and electricity power pricing, and Ryan Ouwerkerk, manager of Americas natural gas pricing, dive into the trends influencing the markets.

Houston — Total US LNG feedgas demand fell to its lowest level in almost six weeks April 8 as scheduled pipeline maintenance substantially reduced flows to Cheniere Energy’s Corpus Christi Liquefaction terminal in Texas, initial nominations compiled by S&P Global Platts Analytics show.

Such work is typically conducted in the spring, during April and May. Maintenance may be lighter this year due to unplanned downtime during winter 2020.

Feedgas demand is still high due to favorable market conditions, though down from the record 11.94 Bcf/d set March 20. Platts JKM is forecast to average about $6.50/MMBtu for the balance of this summer, bearish to the curve by about $0.70/MMBtu, allowing the JKM/ Dutch TTF spread to widen marginally through summer to $1/MMBtu on average, just enough to keep pulling in the necessary African and North American swing LNG supply.

Gas deliveries to the six major US liquefaction facilities totaled 9.46 Bcf/d on April 8, the lowest level since Feb 26, Platts Analytics data show. The depressed level was due largely to a drop in deliveries of 2 Bcf/d to Cheniere Energy’s Corpus Christi Liquefaction facility in Texas, based on initial nominations that were subject to be revised.

The flows were impacted by a planned maintenance on Corpus Christi Pipeline’s Sinton compressor station that was scheduled to last for eight hours April 8, according to a notice to customers. The work involved annual emergency shut down testing. Because of the short duration, it was likely that actual gas deliveries to the terminal would be revised higher if gas was able to be delivered to the facility later in the day.

Also April 8, the Cove Point Pipeline, which feeds the Berkshire Hathaway-operated Cove Point Liquefaction facility in Maryland, was reporting an outage due to unplanned maintenance involving one engine at the Pleasant Valley compressor station in Virginia. The facility was being evaluated to determine the estimated duration of the outage, according to a notice to customers. While feedgas deliveries to the LNG terminal were stable above 700 MMc/d on April 8, based on initial nominations, there could be a small pullback in deliveries during the duration of the pipeline maintenance.

Cheniere’s Creole Trail Pipeline, which feeds Cheniere’s Sabine Pass liquefaction facility in Louisiana, has scheduled maintenance at its Gillis compressor station from May 3-7, according to a notice to customers.

Market outlook

So far this April, feedgas deliveries have remained strong at as the Gulf Coast netback into both JKM and TTF remain around $2-$3/ MMBtu for the remainder of 2021.

Despite supply-side growth and a shift in trade flows, the JKM, the benchmark for spot-traded LNG delivered to Northeast Asia, has recently found support, rising from a 2021 low of $5.56/MMBtu in the first week of March to close at $7.35/MMBtu on April 8. This increase can be attributed to a supportive backdrop in the wider commodity complex, where TTF, JKM’s main anchor, has been firmly buoyed higher by record EU carbon prices, strong coal prices, and stronger oil prices, according to Platts Analytics.

Record LNG exports out of North Africa along with strong US LNG export volumes have outweighed persistent supply-side constraints in Norway, Trinidad and Tobago and Malaysia, in turn pushing global LNG supply into year on year growth and holding global liquefaction utilization at about 72%. There is considerable upside supply risk through shoulder season from Qatar and the US, if maintenance is lighter than usual, Platts Analytics data shows.

Gas production in the Haynesville Shale is surging into the spring season as operators there respond to strong wellhead economics and a brightening outlook for LNG export demand this year.

Month-to-date, output is trending at record-high levels over 13 Bcf/d, with gains widely distributed across the Texas and Louisiana portions of the play, data complied by S&P Global Platts Analytics showed.

Recent production strength comes following a steady build in drilling and completion activity over the past seven months. In February, rig count in the Haynesville briefly topped 50, reaching its highest since December 2019. The milestone marks a dramatic turnaround from last summer when the basin’s rig count tumbled to a pandemic-fueled low at just 31, recent data published by Enverus showed.

Following a global fallout in commodity prices in first-quarter 2020, drilling activity in every other US shale basin has remained at just a fraction of its pre-pandemic level. While most US operators opt to maximize free cash flow over growth, producers in the Haynesville appear more bullish this year.

IRRs

Comparatively strong internal rates of return, or IRRs, in the Haynesville are giving producers there at least one good reason to pursue growth this year.

As of March 2021, operators in there are clearing an average 15% return on wellhead production, based on a half-cycle, post-tax analysis from Platts Analytics. While those gains fall short of the 25% to 35% return earned by producers in Permian, they still rank among the highest in North America for a dry gas basin – outperforming Marcellus and Utica IRRs, currently estimated around 8% to 10%.

Higher Henry Hub forward gas prices this year compared to last are responsible in large part for the Haynesville’s strong drilling margins. Despite a steady decline in the forward curve since mid-February, the rolling 12-month average price at the Henry Hub still remains in the low-$2.70s/MMBtu, up sharply from year-ago forward-price levels closer to $2.30/MMBtu, S&P Global Platts M2MS data showed.

LNG

Given the Haynesville’s strategic proximity to the US Gulf Coast, a bullish outlook for LNG export demand this summer is giving producers there another good reason to grow output.

In April, feedgas demand from the Gulf Coast’s four LNG terminals, including Sabine Pass, Cameron, Freeport and Corpus Christi, has trended near record-high levels averaging about 10.8 Bcf/d.

With the Platts JKM currently priced in the low-$7s/MMBtu through July, roughly flat to current levels, US exporters should continue to enjoy relatively strong margins to the Northeast Asian market this summer.

According to a recent forecast from S&P Global Platts Analytics, US terminals should continue to operate at over 90% capacity utilization through the summer. Last summer, record-low global gas prices prompted many exporters to defer cargo-liftings, slowing feedgas demand and ultimately shutting-in some US liquefaction capacity.

Houston — Cheniere Energy expects LNG demand to increase until 2040, though it may decline beyond that due to continued global action to reduce greenhouse gas emissions, presenting risks for existing US liquefaction terminal operators and project developers, the company said April 9.

The conclusions were issued in a report assessing the long-term impact of climate change mitigation policies and trends that are in process or under consideration globally.

North American exporters are under pressure to show that LNG produced from shale gas can bridge the energy transition to greater use of cleaner-burning fuels and aid rather than impede buyers’ carbon reduction goals. At the same time, they must address how a future of lower demand for fossil fuels will impact their growth goals. Some developers have delayed or canceled new projects.

“Cheniere can minimize the risk beyond 2040 to its business from peak demand by maintaining a disciplined capital investment and return strategy, consistent with expected market trends,” the company said in the report.

Cheniere’s analysis relied on three scenarios. One produced by the International Energy Agency accounts for existing policy frameworks and announced policy intentions, including the Paris Agreement, and reflects the potential impact of these on the energy sector out to 2040. The second, also published by the IEA, involves sustainable development more generally. The third, by consulting firm McKinsey, is part of its global gas outlook to 2050.

In addition, Cheniere incorporated cost-curve analysis of LNG projects based on projected supply, demand, costs and carbon pricing.

“Under all three scenarios, demand for LNG increases from 2020 levels through 2040, resulting in supply gaps to varying degrees,” the report said. “Additional LNG supply, i.e., beyond existing and under construction liquefaction projects, would be needed to meet this demand.”

The report added that “continued action to reduce global GHG emissions may cause LNG demand to decline beyond 2040.”

Cheniere hopes to be producing LNG from its ninth and, for now, final liquefaction train by the end of this year.

The company has also proposed an up to 10 million mt/year mid-scale train expansion at its Texas facility. It has yet to make a final investment decision, however, as it takes a measured approach to its growth plans in light of market and climate change impact considerations. In December, CEO Jack Fusco said in an interview that the project “will happen when it happens.”

As the biggest US LNG exporter, Cheniere is a major buyer of physical gas that it uses in the liquefaction process. Much of the gas is drilled in shale basins stretching from the US Gulf Coast to the Northeast to Western Canada.

In February, Cheniere said it would give its LNG customers emissions data associated with each cargo it produces at its two US export terminals, in a bid to make its environmental footprint more transparent.

Emissions goals

With strict carbon emissions goals, European utilities are being pressured to shy away from signing new deals for importing US shale gas. France’s Engie said in November 2020 that it had halted talks with NextDecade about a supply deal tied to the developer’s proposed Rio Grande LNG facility in Texas.

In its new report, titled “Climate Scenario Analysis: Transitional Risk,” Cheniere said it believes its full-service business model will be resilient regardless of the impact of the scenarios it considered, or other market factors.

“The uncertainty in how the market will evolve and the continued importance of cost competitiveness reinforce the importance of a disciplined approach to deploying capital,” the report said.

“Ongoing monitoring of energy policies, market trends and the LNG business cycle will continue to be important to inform business decisions. While cost is paramount, commercial innovation, flexibility and non-economic factors, such as reputation and reliability, will be valuable differentiators in a competitive global market.”

Increased retail fuel prices and fears of a COVID-19 resurgence have prompted refiners in India to slow crude runs. This week’s tracker also looks at the impact of maintenance on US LNG terminal utilization and possible reductions in biodiesel blending mandates in some countries due to rising vegetable oil prices.

1. Rising retail prices, COVID-19 resurgence in some provinces worry Indian refiners

What’s happening? Indian refiners are starting to slow their crude runs as high retail prices have dented domestic appetite for oil products—a trend that could be prolonged if the resurgence of COVID-19 in some provinces leads to another round of lockdowns.

What’s next? Platts Analytics expects India’s oil demand in 2021 to remain slightly below the 2019 level due to weakness in the first half, but demand will register growth of 440,000 b/d on the year, after declining 470,000 b/d in 2020. As states such as Maharashtra and Karnataka witness a sharp surge in COVID-19 cases, prompting authorities to implement restrictions, analysts said that demand for certain oil products like gasoil and gasoline could face another setback, resulting in refiners adopting a cautious approach on throughput. In addition, maintenance at some refineries in April would also keep crude throughput at a low ebb.

2. Maintenance season to impact US LNG terminal utilization

What’s happening? US liquefaction terminals and the pipelines that feed gas to them typically conduct scheduled maintenance during April, May and June. That means that feedgas demand will drop for periods of time from the record highs near 12 Bcf/d that have been seen in recent months amid favorable global market conditions. There may be fewer and shorter lulls at US terminals than in recent years if maintenance is lighter during the shoulder season due to unplanned downtime in winter 2020.

What’s next? Cheniere’s Creole Trail Pipeline, which feeds its Sabine Pass liquefaction facility in Louisiana, has scheduled maintenance at its Gillis compressor station from May 3-7, according to a notice to customers. S&P Global Platts Analytics forecasts Platts JKM to average about $6.50/MMBtu for the balance of the northern hemisphere summer, bearish to the curve by about $0.70/MMBtu, allowing the JKM/Dutch TTF spread to widen marginally through summer to $1/MMBtu on average, just enough to keep pulling in the necessary African and North American swing LNG supply.

3. Rising global vegetable oil prices could lead to reduced biodiesel blending mandates

What’s happening? Global vegetable oil prices have increased sharply, mainly reflecting global low stocks, strong demand for food and energy, and also a slow output recovery, especially for palm oil. In Brazil, despite seasonally low stocks in January and an expected bumper 2021 crop, soybean oil prices have jumped over 28% from the lows in mid-January to record high prices in mid-March. CBOT futures reached a record in March, but the higher levels were not entirely offset by weaker FOB premiums.

What´s next? There are some factors that could limit the soybean oil price hike in the near term. Palm oil production in Malaysia and Indonesia is recovering and is expected to rebound in the next few months, providing additional supply to international markets. As vegetable oil prices rise, some biodiesel blending mandates could be temporarily lowered. Market participants reported possible mandate reductions in Argentina and Brazil in the next months.

4. German year-ahead power moves above France on CO2 rally

What’s happening? German year-ahead power prices have risen above their French equivalent, reversing a Eur1/MWh discount early March to a premium with the benchmark contract trading at the highest since 2011, driven by record-high carbon prices, exchange data show. Prices almost tripled from 2016 as EUA carbon allowance prices soared from around Eur5/mt in 2016 to trade above Eur44/mt for the first time ever. French year-ahead baseload power around Eur57/MWh was the highest in over two years and well above the regulated nuclear price ARENH set currently at Eur42/MWh.

What’s next? Negotiations between France and the European Commission on reform of the ARENH are near their end, according to French unions that have been staging 24-hour strikes against plans to restructure state-owned utility EDF. According to S&P Global Platts Analytics’ latest Five-Year Forecast, the German baseload should move above its French equivalents from 2022 with the premium increasing to Eur4.10/MWh by 2026. “Germany’s exit from nuclear combined with the coal phase-out results in a structurally shorter market while we assume that French nuclear capacity will remain fairly stable amid a step up in renewable growth,” Platts Analytics’ Sabrina Kernbichler said.