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The `mess` of the liquefied natural gas market. with `force majeure` declarations. rejected and redirected cargoes and pricing disputes amid a glut of supply is much worse than expected. but offers hope for a sharp rebound. according to respected consultant Fereidun Fesharaki.
The latest collapse in LNG spot prices to $US2.50-$US3 per million British thermal units due to the impact of the coronavirus on Chinese demand shows there is a lot more pain to come. said the chairman of consultancy FACTS Global Energy (FGE) from London.
He pointed to the likely shut-in of some LNG export capacity. delays to new projects and mounting losses among buyers forced to re-sell expensive cargoes they do not need among the fallout consequences.
`We had predicted the price collapse over a year ago. but still the ramifications are huge and painful.` Dr Fesharaki said.
`It was already going to happen but [with the coronavirus] it just happens faster and more brutal.`
Dr Fesharaki said `every LNG importer is facing substantial losses` on their oil-indexed purchases. which are well out of the money compared to ultra-low spot prices that are also burning suppliers.
FGE estimates importers buying contracted cargoes are suffering losses of 50-70 per cent on excess LNG they are forced to re-sell on the spot market. Japan`s Kyushu Electric Power has reported losses from the resale of LNG of ¥17.9 billion ($243 million) up to the end of December.
`A lot of people are hiding it. but we will be expecting to hear a lot more announcements in the next two or three months of massive losses.` Dr Fesharaki said.
The hit to Chinese demand for LNG due to coronavirus has exacerbated the already weak market due to huge increases in capacity in Australia. the US and Russia. combining with soft demand in a mild northern winter.
The virus crisis has triggered a wave of cuts to price and demand forecasts as analysts assess how long it will take before a return to a balanced market. with estimates of between mid-2021 and 2023.
However. Dr Fesharaki puts about 40 per cent chance on a more optimistic scenario. where a further slump in spot prices to below $US2.50 MMBTU or even below $US2 triggers a sharp upturn in demand at the same time as some exporters are shutting down capacity or extending maintenance.
`Many buyers. new and old. will see this as a golden opportunity to increase gas consumption at lower prices. resulting in higher levels of demand than we have all assumed.` he said.
Dr Fesharaki said that could lead to prices rebounding to $US4-$US6 MMBTU even before the next northern winter of 2020-21. While some shut-in LNG export capacity could then come back online. that scenario points to an earlier return to market balance and more neutral prices.
Meanwhile. he played down the significance of major Chinese buyer CNOOC declaring `force majeure` on LNG purchases from Shell. Total and Vitol. He said sellers such as Shell had already taken measures to minimise LNG sales into China in recognition of the obvious drop in demand.
`It`s not a big deal.` he said. pointing to the only `real` force majeure dispute being between CNOOC and Total. `It`s not something that is catching fire everywhere.`
Dr Fesharaki said when it came to new projects. the price rout was having a `very chilling` effect. slowing construction work on already sanctioned projects and delaying final investment decisions.
He still expects Woodside Petroleum to proceed with its $16 billion Scarborough LNG project because there is so much riding on it for the company and its management. A decision is due later this year.
But he put the chances of the P`nyang project in Papua New Guinea – which would feed an expansion of PNG LNG – of about 30 per cent. and said Santos could delay its $6.9 billion Barossa gas project. which would supply replacement gas for Darwin LNG.
`You don`t have to do it right away. you have a bit of time.` he said. `You wait until the environment gets better so that your boards are willing to listen to you.`
