The economics for U.S. LNG entered new territory this year, as price spreads to international destinations, particularly from the Gulf Coast export terminals, went from an average $4-8/MMBtu a couple of years ago to $1/MMBtu or less in 2020 to date. The tighter spreads reduced netbacks for U.S. offtakers and led to mass cargo cancellations this summer. Moreover, current futures curves show Henry Hub price spreads to Europe and Asia staying mostly in the $1-$3/MMBtu range over the next few years, suggesting that the arbitrage for U.S. LNG exports, particularly from the Gulf Coast terminals, likely will remain tighter and make commercial decisions to lift or cancel U.S. cargoes much more nuanced than they ever were before. Today, we delve into the primary cost components that factor into offtakers’ netbacks.
As we said recently in our As Long As The Price Is Right blog, the economics for U.S. LNG exports not that long ago were practically a no-brainer. The economics made sense as price spreads were wide and provided sufficient netback margins for offtakers, after covering costs. U.S. offtakers didn’t have to get too nitpicky about the costs or wring their hands about whether to lift or cancel cargoes. But earlier this year, as oil prices collapsed, COVID-19 lockdowns decimated worldwide gas demand, international gas prices plummeted, and the price spreads to Europe and Asia — the biggest destination markets for U.S. LNG — collapsed. Spreads between the U.S. national benchmark Henry Hub and Europe’s Dutch TTF (left bars in Figure 1) and UK NPB (middle set of bars) prices fell from an average of near $5/MMBtu in 2018 to $0.60/MMBtu on average in 2020 to date after flipping to negative for a couple of months in late spring/early summer. The spread from Henry to Asia’s Japan/Korea Marker (JKM; right bars) went from well over $6/MMBtu two years ago to little more than $1/MMBtu this year. Positive netbacks for U.S. offtake vanished, and cargo cancellations abounded (see Undone and LNG Interruption).
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