Shut Down, Part 2 - Global Market Impacts of the Freeport LNG Outage

Freeport LNG is expected to be offline for an extended period following last week’s explosion and fire at the export terminal, leaving the global gas market even more undersupplied than it already was. The outage cuts U.S. export capacity by about 2 Bcf/d at a time when Europe is still taking in huge volumes of LNG to offset declines in Russian supplies and bolster storage ahead of winter. This is all happening as another large exporting nation, Australia, is facing a critical winter energy crisis of its own and South American demand is headed toward its seasonal high, straining an already tight market. Today’s RBN blog continues our series about the ongoing Freeport outage, this time looking at the impact to the global gas and LNG markets.

An explosion and fire occurred at the Freeport LNG export terminal on Quintana Island, TX, on June 8. Thankfully, no one was injured during the incident, but the entire terminal remains offline. Freeport said shortly after the incident that the terminal would be offline for at least three weeks. It also declared force majeure and canceled all cargoes scheduled for lifting through June 30. That timeline never really seemed all that likely, with state and federal regulators, including the Pipeline and Hazardous Materials Safety Administration (PHMSA), investigating the incident and having approval over the return to service. Freeport said in an update June 14 that a full resumption of operations and LNG output is not expected before the end of this year, but that it may be able to resume partial service after 90 days, subject to regulatory approval. Preliminary investigations of the incident have indicated that the explosion was caused by a rupture in the LNG transfer line, which led to the rapid flashing of LNG and the release of a natural gas vapor cloud, which ignited. The explosion was in a contained location near the storage tank area and none of the liquefaction trains, storage tanks or docking infrastructure were damaged in the incident.

The outage is already having a profound impact on overseas markets and in the U.S. gas market, which lost 2 Bcf/d of gas demand. In Part 1 of this series, we looked at its impact on the U.S., including how gas flows and prices changed in the immediate aftermath of the outage. Natural gas prices initially dropped with the loss of demand but rebounded somewhat as some of the more dramatic impacts were obscured by a run of hot weather. Those higher temperatures have increased domestic demand, but the outage will likely mean larger storage injections for the U.S., as there is only limited pipeline takeaway capacity out of Texas for that 2 Bcf/d of missing feedgas demand. And with the announcement of the longer-term outage, CME/NYMEX Henry Hub July futures prices fell again Tuesday, this time plunging $1.42 (16%) to close at $7.189/MMBtu. It climbed $0.231/MMBtu (5%) on Wednesday to settle at $7.420/MMBtu. The additional gas for storage, however, may not be unwelcome, considering that U.S. storage inventories are sitting near the bottom of the 5-year range and Henry Hub July futures (green line in Figure 1) were approaching $10/MMBtu prior to the incident. But for consumers of LNG, the loss of the terminal will be felt sharply, and the longer the outage lasts, the more strain it puts on global gas markets.