U.S. LNG cargoes’ ability to reach different destinations has become increasingly important for the global market as more liquefaction trains continue to come online, oversupply conditions worsen, and international price spreads have shrunk. Earlier this week, Freeport LNG’s first train began commercial service, marking the sixth U.S. liquefaction and export facility to start commercial operations. About 30% of U.S. long-term contracts for currently operating or commissioning liquefaction trains are held by global portfolio players — i.e., offtakers with large international portfolios and the ability to shift cargoes around the world as prices move. And destination flexibility doesn’t end there, as the other types of offtakers also have shown an increased willingness to divert or even re-sell cargoes in the spot market to better take advantage of shifting price spreads. Today, we continue a series on U.S. LNG export trends, this time focusing on how global prices impact cargo destinations.
In Part 1, we began by examining the growth of U.S. LNG exports even in the face of extreme oversupply in the global market as new export capacity has come online both in the U.S. and Australia. As a result, the UK’s National Balancing Point (NBP) and the Japan-Korea Marker (JKM) fell to multi-year lows this summer and remain well below year-ago levels. Moreover, the spread between NBP and JKM has collapsed, with Asian markets no longer carrying as much of a premium to Europe. Despite the weakening international market, however, U.S. LNG exports have continued to set new records. That’s largely due to long-term, take-or-pay commercial offtake agreements associated with each new liquefaction train that ensure cargo liftings.
In Part 2, we elaborated on how those contract structures and terms keep U.S. exports of LNG going independent of global market conditions. In the case of Cheniere Energy’s Sabine Pass and Corpus Christi terminals, the operator’s hybrid free-on-board (FOB) structure allows for the offtaker to refuse a cargo, but the offtaker still has to pay most of the cost. So, not only are offtakers incentivized to take their cargoes, but if they do refuse, Cheniere’s marketing arm is then entitled to that cargo and can produce it for a very low marginal cost. Thus, the likelihood is that between the offtaker and Cheniere, the contracted cargoes will almost certainly be exported. All of the other terminals currently operational or undergoing commissioning, including Cove Point, Cameron, Freeport and Elba Island, utilize a tolling structure, which offers even less flexibility than Cheniere’s model. Under a tolling structure, the offtaker already owns the LNG and cannot refuse a cargo. Even when prices are low, cargo refusals are extremely rare. That said, secondary customers of U.S. offtakers can cancel cargoes. In November, Pavilion Energy, a Singaporean gas importer, refused a cargo from Cameron offtaker Mitsubishi. Pavilion was still financially responsible for the cargo, and Mitsubishi still exported it. Our latest ship tracking indicates the cargo is now headed for Japan. When prices are low, cargo deliveries can get shuffled to different destinations but the overall export volume from the U.S. remains unaffected. So, with 90% of U.S. LNG export capacity underpinned by long-term contracts, the U.S. likely will keep exporting at a high rate, regardless of global prices.
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