Henry Hub natural gas spot prices reached a nine-month high in June, according to the Energy Information Administration (EIA), which bumped its forecast for 2016 prices up to $2.36/MMBtu, with 2017 prices expected to average $2.95/MMBtu. In fact, LNG producers reported a banner month, as LNG exports rose by 500,000 tons to a total of 3.6 million tons during June 2016, an increase of 18.5 percent from May.
I would also predict a short term price rise as Cheniere Energy’s Sabine Pass liquefied natural gas (LNG) export plant on the U.S. Gulf Coast will shut down for planned maintenance in September
McKinsey Energy Insights (MEI), predicts in its latest research that LNG oversupply could last until 2024. As a result, this could mean that few LNG projects will reach final investment decision (FID) in the next 12 to 18 months including those in British Columbia.
MEI’s research shows that the current global LNG supply glut is exacerbated by the 100 mtpa of new export terminal capacity currently under construction in the U.S. and Australia. Furthermore, by 2019 oversupply will peak at 60 mtpa.
Their research shows that the current market oversupply is creating challenging conditions for operators hoping to take FID on projects in the near term,” said James Walker, a specialist at MEI. “For these projects to be viable they would require an assumption of either a sustained high LNG price post-2024 or a cost optimization strategy to reduce projected capital expenditures. Many projects will struggle to secure enough firm buyers in an oversupplied market. Even if projects do manage to progress to construction, the LNG supply will be hitting the market at a bad time.”
Here in BC we are seeing the effects with slumping natural gas prices on the global market meaning that the province budgeted for $128 million in royalties this year, far from the $493 million collected two years ago.
Changes in Policy Japan
Another challenge to future LNG growth comes from Japan, where regulators are examining contract restrictions and allowing LNG shipments to be re-sold, potentially under-cutting producers and putting downward pressure on prices. Such a move would disrupt existing contractual relations and potentially sever the link between LNG and crude prices. Existing restrictions on re-sale essentially force importers to consume whatever LNG they import; dropping these restrictions would allow importers to essentially become LNG merchants themselves, re-selling unwanted or unused LNG to other customer
Kitimat LNG Canada project indefinitely postponed.
LNG Canada CEO Andy Calitz said that a drop in natural gas prices around the world, particularly in Asia, has made the project too expensive for now. The consortium LNG Canada, which is jointly owned by Shell, PetroChina, Mitsubishi and Koga, was set to make a final investment decision for the project last February. That decision was later pushed back to the end of 2016.
I would predict that no decision is made until after the provincial election in 2017 with the company stating, “At this time, we cannot confirm when this decision will be made.
While Petronas could still make a decision this year, it faces some of the same market challenges that Shell faces, plus the added hurdles of First Nations hostility, an environmentally problematic site and a federal government that appears to be in no hurry to see the project proceed.
The two projects combined would represent a total capital investment of roughly $80 billion in British Columbia– the spending equivalent of about nine Site C dam projects.
The Panama Canal now allows wider liquefied natural gas carriers to pass through, making it possible for U.S. shale gas to more easily make its way to Japan.
The canal used to be able to accommodate vessels 32 meters wide. Now it can handle ships with widths of up to 49 meters. This, together with newly launched U.S. LNG exports, had promised to alter global energy distribution networks.
U.S-based LNG exporter Cheniere Energy in February started shipping LNG from a terminal in the U.S. state of Louisiana, along the Gulf of Mexico. And Sempra Energy’s Cameron LNG facility, near the Gulf Coast of Louisiana, recently received authorisation from the US Department of Energy (DOE). The authorisation will allow the company to export an additional 1.41 billion ft³ of natural gas per day (bcfd) from the proposed liquefaction expansion project to countries that do not have a free-trade agreement with the US. Following the order, the facility’s export capacity will be 24.92 million tonnes per year.
The USD$10 billion facility, which is under construction, is expected to commence operations during 2018 with the first full year of operations set to begin in 2019.
Many others are to follow. The U.S. Department of Energy estimates that some 550 LNG carriers will go through the Panama Canal per year. Most of them are bound for Japan and elsewhere in Asia.
Citibank paints another picture though with their analysts reporting on 13 July that U.S. LNG is too expensive to compete in the Pacific, even with the newly-upgraded Panama Canal allowing for larger shipments. The canal expansion, completed on 26 June, was expected to be a game-changer, as before only 6 percent of the world’s LNG fleet could pass through the locks, whereas now only the largest class of ship is incapable of passing through.
While Hawaii is a tiny market, it is interesting to note that In mid-May, Hawaiian Electric said a proposed contract to deliver 800,000 mt/year of LNG to Hawaiian Electric from FortisBC’s Tilbury LNG facility in British Columbia, starting in 2021, was contingent on the Hawaii Public Utilities Commission approving the merger. All of these things chip away at BC’s LNG Dream.
British Columbia’s biggest future customer according to many, Japan imported 88 million tons of LNG in 2014. According to a projection that the Japanese government made last year, the country’s LNG demand is expected to decline to about 65 million tons by fiscal 2030. Korea’s imports are down, and while Chinese demand is growing, a full 69% of their needs come from their own gas fields. This percentage is expected to rise as China looks for more self-dependence.
The provincial Liberal government’s 2013 jobs plan promised LNG would generate $1 trillion in economic activity and create a $100 billion prosperity fund.
There is $100 million in that fund. It came from general revenues.