Steady as She Goes, Part 5 - How Global Prices Drive U.S. LNG Cargo Destinations

After showing relative strength through most of the fall, prices at the UK’s National Balancing Point (NBP) natural gas benchmark collapsed by more than $1/MMBtu in December and have kept falling, and Asia’s Japan-Korea Marker (JKM) index followed suit to some degree. Nevertheless, U.S. LNG export cargoes were at record highs in December as additional liquefaction and export capacity came online last month, including the first LNG export cargoes from the Elba Liquefaction project as well as Freeport LNG’s Train 2. Moreover, U.S. shipments are expected to climb further in the New Year as still more liquefaction trains are completed. While the global price spreads haven’t deterred U.S. exports, they, along with shipping costs, do influence export economics and cargo destinations. Today, we wrap up this series with a look at how LNG export costs interact with global price spreads and impact cargo destinations.

We began this blog series with an examination of how the global LNG supply glut is affecting U.S. LNG exports. The NBP and the JKM this past summer fell to multi-year lows as the influx of LNG supply from the U.S. and Australia, as well as high European gas storage levels, worsened the oversupply conditions. Both price indexes rebounded somewhat in the fall but remained much lower than in years past. At the end of December, prices — particularly NBP — tumbled lower again, following news that Ukraine and Russia signed a deal for continued Russian gas exports to Europe via pipeline through Ukraine for at least the next five years. Although this doesn’t represent a change in flows to Europe, market sentiment that a new agreement would not be reached before the current contract expired on December 31, 2019, was turned on its head, providing some support for European prices. Despite the weakening international market, however, U.S. LNG exports have climbed steadily and set new records in recent months, including in December, when a total of 63 cargoes departed U.S. terminals. That’s largely due to the long-term, take-or-pay commercial offtake agreements associated with each new liquefaction train that virtually ensure cargo liftings.

In Part 2, we examined the two contracting models that have emerged among U.S. LNG developers: Cheniere’s hybrid free-on-board (FOB) model, which is utilized at its Sabine Pass and Corpus Christi facilities, and the tolling model used by Cove Point, Freeport, Cameron and Elba Liquefaction. We discussed how contract structures and terms — with their high fixed costs and limited flexibility to refuse a cargo — keep U.S. exports of LNG flowing independent of global market conditions. With 90% of U.S. LNG export capacity underpinned by these long-term contracts, the U.S. likely will keep exporting at a high rate, regardless of global prices.