LNG price slump signals warning for future

From LNGworldnews:

Prices of spot liquefied natural gas for September delivery to Asia plummeted 33.1% year over year to an average $10.702 per million British thermal units (/MMBtu), the latest Platts Japan/Korea Marker (Platts JKM) for month-ahead delivery showed.

The drop came as increased supply in the region continued to outweigh lackluster demand.

On a month-over-month basis, the September JKM was down 5.8% from August. The data reflects the daily Platts JKM for September assessed between July 16 and August 15, and expressed as a monthly average.

“The results of Australia’s North West Shelf LNG tender for cargoes loading in September, October and November showed a steep contango building into the traditionally high-demand winter season,” said Stephanie Wilson, managing editor of Asia LNG at Platts. “This prompted some buyers in Japan to purchase cargoes for October at prices significantly above those seen in September.”

At $10.702/MMBtu, the average Platts JKM for September was the lowest monthly average on record since April 2011, and reflected the largest year-over-year decrease in 2014.

Despite the year-over-year plunge for average September-delivery prices, the month-over-month decline was the narrowest since March, when prices began their rapid descent.

After beginning the assessment period at $10.775/MMBtu July 16, spot prices bottomed at $10.525/MMBtu August 1 as a slew of supply tenders in the Asia-Pacific basin hit the market. It was the lowest daily spot price seen since Friday, March 11, 2011, when the JKM was $9.90/MMBtu. The spot JKM had spiked to $10.95/MMBtu on March 15, 2011, in the wake of the Great Eastern Earthquake and resulting Fukushima crisis in Japan.

The Platts JKM began its rebound on August 8, gaining a total of 40 cents before ending the assessment period at $11.025/MMBtu August 15. This brought a close to five consecutive months of declines and reversed the downtrend in spot prices.

“The removal of deferment clauses on cargoes loading from train 1 of the new ExxonMobil-led Papua New Guinea integrated LNG project also fuelled the more bullish sentiment, as traders and sellers can now compete for these cargoes too,”Wilson explained. “On the other hand, end-user inventories remained high despite higher temperatures in Japan and South Korea in recent weeks, giving buyers flexibility in their delivery schedules. Numerous projects in Asia also continued to offer additional supply to the spot market, which could suggest a cap to potential price increases.”

Like so many vital Australian commodities these prices are very tightly held so I have to rely on doctored charts. Here’s my best effort to give you an idea of how unusual this is:

zdfad

If one new project of 7 million tonnes per annum (mtpa) in PNG is enough to trigger this kind of price rout (in conjunction with a mild summer) then what is the 44 million tonnes coming on stream from Australia and Sabine Pass in the next year going to do, I ask ya?

27 Responses to “ “LNG price slump signals warning for future”

  1. Researchtime says:

    Have to give it to you H&H – you are concentrating on the real stories that fly under the radar… good for you.

    • It’s pretty easy. Once you get clear of the wall-to-wall bullshit, it is a remarkably simple economy.

      • bobalot says:

        Only in a sea of bullshit, speaking the truth becomes a revolutionary act.

      • Bubbley says:

        How do you think the Inpex/Ichthys gas project will be effected by this? Its owned by Tokyo Gas, Osaka Gas, Chubu Electric Power and Toho Gas.

        “The Ichthys Project will have an initial capacity to produce 8.4 million tonnes of LNG per annum and 1.6 million tonnes of liquefied petroleum gas (LPG) per annum, as well as approximately 100,000 barrels of condensate per day at peak.”

        (from the website) http://www.inpex.com.au/projects/ichthys-project/project-overview.aspx

        70% of the out put is supposed to go to Japan.

        Looks like a good time to sell gas stocks.

    • Wiley Wolf says:

      This news is not so much under the radar, but IMHO quarantined by the MSM, and particularly the Govt to keep the real disaster of the (typical) GLNG developments away from the public. I have always maintained the non performance of the GLNG projects will trigger the recession in QLD, and still hold that opinion. These CSG projects were “pink batts” on steriods.WW

  2. 3d1k says:

    Two opposing outlooks for LNG discussed further here:

    http://www.thebull.com.au/premium/a/46838-is-the-lng-boom-on-life-support.html

    Don’t forget most Oz LNG forward sold 20 year contracts.

    • HRHolden says:

      “Don’t forget most Oz LNG forward sold 20 year contracts.”

      That’s what I was about to say, (have been saying too).

      But I think HnH was inferring that with the head line “…signals warning for future” – ie no more new LNG.

      Not sure we’ve got the gas for it in the east anyway – but that’s another story….

      That and our stoopid CAPEX costs …

      • 3d1k says:

        Agree new projects unlikely at present but expect that will change: waiting to see FLNG prove; US exports fail to ignite and pricing consolidate!

      • HRHolden says:

        Some say the Henry Hub price was depressed due to a tanked US economy and use it or loose it provisions in US PELs – forcing many of shale plays into production, leaving the price unsustainably low for the long term.

        Now US manufacturing is recovering and possibly the shale oversupply has abated (for various reasons); but either way HH has been recovering hitting $6 in the winter peak – back down to $4 now. (it went below $2 in the shale boom.

        Do you think it’s a higher long term HH price that will cap US LNG volumes?

      • 3d1k says:

        A bit of a catch 22! Higher HH required to ensure ongoing viability for new drills; add liquefaction transport etc to higher HH and much purported competitive pricing advantage diminishes; waiting in the background is debated decline rate and proven reserves.

      • HRHolden says:

        “waiting in the background is the much debated decline rate and proven reserves” … indeed. That was my “(for various reasons)” reference.

    • Researchtime says:

      Thats a good article…

      In regards to 20-year LNG contracts – maybe historically, linked to some oil index. But that has long been broken now – and will never happen again. So much so, the Japanese of all people – are now actively seeking to re-negoiatate those exact LT contracts signed 10 years ago.

      Trust me when I say – no new project will use LT contracts… and no Oz/Canadian or any other LNG project can compete with Russian pipelines.

      • 3d1k says:

        There are provisions within the contracts to renegotiate price should prescribed divergence from contract pricing occur – my understanding is that none have been successfully concluded – happy to be corrected on that.

      • Researchtime says:

        That is true… I may have mentioned before the main difference between the Chinese and Japanese in business an iron cast contract with the Chinese is often not worth the paper its written on; whereas a LOI (letter of intent) with a Japanese utility is bankable.

        In saying the above, the Japanese will not break existing contracts. But knowing a little of their business prowess, and what they did to coal and iron ore prices in the 1980′s and 1990′s, the payback will be brutal. So much so, I suspect that several Australian LNG producers at the expiry of the contracts will struggle just to cover operating costs (and could close).

        There WAS a 1400km pipeline proposal running between Russia’s Sakhalin Island and Japan’s Ibaraki prefecture, northeast of Tokyo (publicly 20bn cubic metres – rumour suggest <40-45). The deal WAS to be concluded when Putin WAS scheduled to visit Japan this year. Its all WAS because the Americans have put pressure on the Japanese to Kibosh the proposal. However my feeling is given Japans increasingly dire economic circumstances, and a large trade deficit, primarily in energy, and the cost to their manufacturing base – implies that pipeline gas and nuclear will be big developments in the near future. Analysts are already predicting a near-term 35% fall in Japanese LNG demand. I think in the LT LNG will not be part of the equation much at all.

        It will be a tough gig indeed in Oz for a bit…

      • 3d1k says:

        Yes, at this point use of the past tense seems appropriate. In addition to US sanctions pressure which are supported by Japan I have wondered if the Chinese mega deal with Russia included discussion around a Chinese preference for Japan NOT to benefit from the pipeline…

      • Researchtime says:

        Don’t think so – that would be asking too much, Russia are now strongly pushing the North Korea and South Korea pipeline.

        On another level – I think Russia does not trust China one iota… they deal with them because of economic war on their Western front (Europe).

        Those who know their history know that China has quite a substantial expansionist tendency. Many don’t realise that in antiquity, the Chinese migrated and miliarily pushed their extended empire almost to Anatolia plateau (in direct contact with the Byzantium), before being pushed pushed back by successive waves of central Asian invaders and in particular of Ottomans (hence the reason why we have a bunch “stans” today). Not ignoring Korea, Vietnam and a lot of South Asia countries who were under direct Chinese rule for very long periods.

        Don’t underestimate China, they are a remarkable people. Their will unbending. They only country to escape being conquered by them is Japan. But they are different in many ways…

      • 3d1k says:

        RTime – I linked an excellent article re all of what you discuss above with the view that China and Russia would unite on many fronts representing an Eastern putsch of sorts – I’ll see if I can find it.

      • China-Bob says:

        the main difference between the Chinese and Japanese in business an iron cast contract with the Chinese is often not worth the paper its written on; whereas a LOI (letter of intent) with a Japanese utility is bankable.

        Very true, those that have never done business in China have trouble understanding that all prices are continuously renegotiated ALWAYS. Your iron-clad contract is only really a starting point, a framework document around which negotiations will occur, so the smartest contracts actually incorporate agreed metrics that will be used in the renegotiation, means you dont start from ground zero each time.

        For a westerner with any business experience this sort of contract is totally strange, A fixed price contract with stated provisions for renegotiation within the time frame of the contract …..That’s not a fixed price contract! my original take was remove all these provisions, its fixed price PERIOD end of sentence. Unfortunately for the westerner that’s not how the Chinese system works, so as their economy has boomed lots of western companies have got sucked deeper and deeper into the Chinese legal system making for contract T&C’s that are a lawyers worst nightmare. The very statement that legally strengths the Chinese contract weakens the English version (wrt case law and normal business expectations) . To say the least: It’s a legal mine field however if you want to attach yourself to the Dragons tail its just what you’ve got to do.

    • Hunson Abadeer says:

      Yes, this is what I find confusing… H&H can you clarify if you are expecting all LNG projects to be hit by lower market prices? My understanding is the QLD projects locked in almost all of their supply to fixed price contracts years ago

      • That’s right. But I do not expect the prices to hold. There is already evidence of unexpected malleability in contract prices and if there is a glut there are many ways for clients and suppliers to agree to discounts without it appearing in the headline number.

      • Hunson Abadeer says:

        Fair enough, cheers

      • HRHolden says:

        HnH – It doesn’t seem to make sense to use off-take agreements – but to have get out clauses if the price tanks. This is the very risk the contracts are supposed to eliminate. Are you saying the contracts really only mitigate the risk of a tanked price?

    • Ronin8317 says:

      Japan’s nuclear reactors remain offline to due political opposition, although two reactors at Sendai (out of 48) have received the green light to restart. With the Japanese economy contracting 6.8% after the sales tax increase, Japan is running out of options. Restarting the nuclear power plants in 2015 will greatly reduce their LPG demand.

      • China-Bob says:

        I was in Tokyo a few months back for a meeting with some power company executives and ALL they could talk about was the absolute necessity to restart their Nuclear reactors. There simply wasn’t another option, if they correctly price electricity from LNG then half of Japans industrial base must to shut down, if they try to absorb the costs then they’ll shut down themselves.

        I was trying to get them to invest in system wide alternate energy solutions but somehow they seemed to think that because I’m an Aussie I have some sort of control over LNG pricing. Made for a fruitless meeting… I didn’t have any solutions for their problem du jour.

  3. sydboy007 says:

    How does the $10.70 translate to sales on the domestic market?

    Hopefully these price falls will help to contain the carnage on the east cost manufacturing sectors.

  4. Peter says:

    LNG price may have been disrupted by the early start-up of PNG-LNG, forcing it into the spot market for early sales volumes ahead of the start of deliveries of its contracted tonnages. All the new LNG tonnages coming on-line over the next two years are sold on contract and will not be priced at spot. Only about 25% of global LNG is sold at spot. Customers have taken advantage of extra, non-contracted tonnage to buy cheaply, stocking up ahead of winter demand.