It has been a chaotic 18 months for North American LNG and the global gas market. In a short time, international gas markets went from oppressively oversupplied balances, high storage inventories, and historically low prices for much of 2020, to reckoning with panic-inducing supply shortage, low inventories, multi-year or all-time high prices in the biggest LNG-consuming regions. The resulting whiplash has transformed key aspects of the LNG market, including making a profound impact on the way existing LNG terminals operate, how projects secure funding and capacity commitments, and what offtakers expect for the next generation of LNG capacity buildout. The tight market appears to have settled the question of whether more export capacity is needed, at least for now, but the market’s sharp U-turn has also put potential offtakers on edge and underscored the need for contractual flexibility. Additionally, pressure to reduce greenhouse gas (GHG) emissions is higher than ever, and LNG offtakers are increasingly demanding greener solutions to address government regulations and public concerns. This convergence of factors has put the LNG market at a crossroads. Taking all of the lessons learned from the past 18 months and before, the industry must now forge a new path forward. Today, we discuss highlights from our new Drill Down report, looking at the major trends that will define the North American LNG market in the coming years.
The domestic and international LNG markets today are almost unrecognizable from a year ago. At this time last year (yellow-shaded area in Figure 1), U.S. Gulf Coast LNG producers were just emerging from the peak of the cargo cancellations that had been occurring all summer long, precipitated by COVID-related shutdowns and demand destruction around the globe. International gas prices had partially recovered from the all-time lows seen over the summer but were still near multi-year lows, while Henry Hub was languishing in the low to mid-$2/MMBtu range. The economics for delivering to Europe and Asia still left U.S. LNG mostly out of the money (see Sultan of Swing for a detailed breakdown of export economics). For example, the Japan-Korea Marker (JKM; gray line on the right axis), the oldest and most liquid LNG price index and a good representation of the global LNG market, fell to historical lows near $2/MMBtu in the spring and carried $2 handles through much of summer. As COVID conditions in Asia began to ease (earlier in Asia than in Europe or the U.S.), JKM prices staged a modest recovery but stayed below $3/MMBtu until the September contract expired in mid-August and prices began climbing from there. This time last year, prices were just shy of $5/MMBtu.
As for domestic feedgas deliveries to the terminals (blue line on the left axis), they had gone from flowing at rates of nearly 100% utilization of operating liquefaction capacity pre-COVID, down to more like a third of the estimated total feedgas requirement (orange line on the left axis) in July 2020. By September 2020, as cargo cancellations were starting to ease, feedgas flows had begun to recover but were still running at little more than 50% of the total requirement. Overall, there was still a great deal of uncertainty about when, how, and by how much global gas demand would recover. With much of the existing capacity sitting idle, the idea of building or expanding LNG terminals, which was already losing favor before COVID, became downright unpalatable. Export projects were losing offtaker or developer interest and being canceled or paused (see Holding On for Life).
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