The global LNG market upheaval has wreaked havoc on U.S. LNG export demand this summer, which, in turn, has complicated operations at domestic export facilities. Gone are the days when U.S. LNG exports would move predictably, increasing with each new liquefaction train coming online and then mostly staying at or near capacity. Rather, as international LNG prices collapsed, U.S. LNG operators for the first time have had to contend with a relentless stream of cancelled cargoes and low facility utilization rates. More recently, cargo cancellations are showing signs of easing somewhat, as international price spreads are improving for fall and winter. But these recent market disruptions provide a window into the ways in which operational constraints and flexibilities will factor into LNG producers’ and offtakers’ decisions — and affect feedgas flows and capacity utilization — in a weak global market. Today, we consider some of the nuances of liquefaction operations.
U.S. LNG producers, like much of the rest of the energy sector, were dealt a difficult hand in 2020. Even before the COVID-19 pandemic, the global LNG market was already drifting toward oversupply conditions and a slowdown in global LNG demand growth. International gas price spreads had been converging as new export projects in the U.S. and Australia were completed and started flooding the market with LNG. The global LNG market was gradually heading for a reckoning of sorts. However, the pandemic — and resulting lockdowns and demand destruction — triggered a collapse, and even reversal, in price spreads that put U.S. LNG largely out of the money and culminated in what was previously considered improbable: cancellations of U.S. cargoes and low utilization of U.S. liquefaction capacity.
As the fallout from COVID-19 has stretched into summer, cancellations of U.S. cargoes have become a regular occurrence in the U.S. gas market, though they are starting to ease now as the global supply-demand balance has tightened and price spreads have widened somewhat. U.S. LNG export demand contracted by more than 60% since early 2020, with most of the facilities operating at much lower utilization rates (Figure 1). The exceptions were Cove Point LNG, which has kept producing at normal rates, and Cameron LNG, which commissioned two of its trains during this period. (We discussed these trends and the economics behind the cancellations in Break It to Me Gently Part 1 and Part 2, and more recently in Undone).
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