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Cancel Culture Pervades US LNG Export Sector

Copyright © 2021 Energy Intelligence Group

With US LNG out of the money in both Asian and European gas markets, cargo cancellations at US liquefaction plants have accelerated dramatically, with between 70 and 100 export shipments already reported canceled for the summer ahead. When the tolling contracts for first-wave US export projects were put in place early last decade, nobody could have anticipated the arrival of Covid-19 -- yet as it turns out those contracts are well suited to the current environment. That is because they were written with destination as well as cancellation flexibility that now provide a relief valve to a badly glutted market. Under a typical US tolling contract, the buyer pays 115% times the Henry Hub Nymex price per million Btu, plus a fixed fee ranging from $2.49/MMBtu-$3.50/MMBtu depending on the contract. If a buyer decides to forgo a cargo, the buyer still pays the fee. This contrasts with take-or-pay agreements -- typically found in other countries such as Australia -- under which the buyer must pay for the entire canceled cargo whether it is loaded or not. Therefore, by design US LNG would likely be the first to be cut back by a portfolio buyer in a market downturn. Still, the cancellation numbers are staggering. As of Jun. 23, Reuters Eikon data suggests that more than half of US LNG capacity is essentially off line, with feed gas supplies at just 4.28 billion cubic feet per day. That is well below an end-March peak of 9.53 Bcf/d but above the 20-month low of 3.6 Bcf/d seen on Jun. 19. Reuters Eikon ship tracking shows US LNG exports reaching their highest level ever in the first quarter with 215 cargoes headed abroad. But that was followed by a coronavirus-stricken second quarter when exports sank to 146 cargoes through the first three weeks of June, more in line with 2019's quarterly average of 136 (see graph). And the third quarter doesn't look promising for US exporters, with Northeast Asian spot LNG price assessments by Energy Intelligence dropping a nickel to $2.15/MMBtu and Southwest European spot LNG price assessments right at $2/MMBtu -- levels ripe for export cargoes to be canceled. "This is effectively the last shoe to drop in a global gas rebalancing process that started with Asia pricing its LNG lower to push excess cargoes toward Europe, followed by Europe sorting its resulting gas market overhang out by pricing high-cost gas supply -- US LNG -- out of the market," Goldman Sachs said in a note last week. And that will put even more downward pressure on gas prices within the US, which is already dealing with a demand drop-off and a storage inventory glut. "By the end of this summer we believe US LNG export cancellations will have added more than 760 Bcf to US gas storage, which is 50% larger than what we would expect a 1-standard-deviation colder-than-average winter to remove from storage," Goldman Sachs said in a note last week. As a result it predicted that storage could reach or exceed capacity of 4,261 Bcf before the end of October. Despite the cancellation trend, existing US LNG exporters are largely insulated from any financial impact and are even taking advantage of the conditions to refinance debt and improve their books (NGW May4'20). Cheniere Energy announced last week that it was refinancing two convertible notes with a $2.5 billion three-year senior secured loan. Analysts at Stifel were pleased. "While the company's leverage reduction plans are likely to be stretched out, pushing dividends out a bit further, the long-term advantage of the refinancing deal is nothing but positive news for the company," they said. "Only locations with storage capacity and sunk costs are completing shipments. ... However, with Cheniere's take-or-pay contracts, that only matters on the marketing business volumes and margins." Cheniere could even benefit from the market downturn despite delays to its own expansion projects. "Cheniere, with its excess capacity on its marketing books and its operating cash flows, is the least risky option to get LNG out of the US," Stifel said. "While coronavirus has hurt near-term LNG demand, the commodity has been more stable [than] oil products and especially coal." Michael Sultan, Washington

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