Steady as She Goes, Part 3 - How Long-Term Contracts Factor into U.S. LNG Cargo Destinations

New U.S. liquefaction trains and LNG export terminals are entering an increasingly oversupplied global market in which international LNG prices are well below where they stood a year and a half ago and price spreads from the U.S. have collapsed. That hasn’t deterred U.S. LNG exports from increasing with each new liquefaction train and capacity contract that goes into effect, as long-term offtake contracts, which anchor more than 90% of the U.S. liquefaction capacity, have made cargo liftings relatively insensitive to global prices. However, the destinations for U.S.-sourced LNG have been in flux based on the types of offtakers holding capacity on newly commercialized trains as well as shifting global prices. Today, we continue a series on cargoes and destinations, this time focusing on how contracts impact cargo destinations.

In Part 1, we discussed the oversupplied market conditions in the two primary outlets for U.S. LNG exports: Europe and Asia. As new export capacity has come online in both the U.S. and Australia — and as increasing supply sources compete into these markets — international prices have fallen to multi-year lows. Despite the low global prices, U.S. LNG exports keep rising. As the UK’s National Balancing Point (NBP) and the Japan-Korea Marker (JKM) hit their low points in July, U.S. exports reached an all-time high, and export volumes have only climbed further since then as new trains have come online and begun commissioning. That’s because more than 90% of U.S. export capacity is locked up in long-term Sales and Purchase Agreements (SPAs), which keep U.S. export volumes flowing even as international prices drop.

In Part 2, we explored the specific SPAs in place and the two contracting models primarily used by U.S. LNG producers to secure capacity commitments for the export terminals: traditional tolling agreements and Cheniere Energy’s hybrid free-on-board (FOB) structure. The non-Cheniere projects currently online or commissioning — Cove Point, Freeport, Cameron and Elba — use tolling agreements, by which the LNG operator charges offtakes fees to liquefy the gas, but does not hold the title to the gas or LNG produced. Instead, the LNG offtaker already owns the LNG produced and must take delivery or resell it. By comparison, the two Cheniere-owned facilities, Sabine Pass and Corpus Christi, use a hybrid model in which the company’s marketing arm secures pipeline capacity and gas supply for its long-term customers. Cheniere takes title to the gas, liquefies it and then sells the produced LNG to its customers on an FOB basis. At the Cheniere plants, customers must pay monthly fixed reservation and liquefaction charges regardless of whether or not they take possession of the LNG. If a cargo is refused, Cheniere’s marketing arm then owns that capacity and can produce and sell the cargo at the marginal cost, which is low, so that cargo will almost certainly still be produced.