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Henry Prices Too High to Support New Long-Term LNG Contracts, BofA Says

Nuclear power restarts in Japan, depressed oil prices and upcoming new liquefaction capacity paint a bearish outlook for global liquefied natural gas (LNG), analysts at Bank of America Merrill Lynch (BofA) said in a recent note.

"...[W]e've kept a bearish view on LNG for some time but now think prices may go even lower in the coming weeks..." BofA said, noting spot LNG prices in Asia that have traded around $8/MMBtu lately and below that earlier in the year.

The analysts said the drop in oil prices has "considerably reduced" the advantage of Henry Hub-based pricing for U.S. LNG exports.

"In Europe, with current UK NBP [National Balancing Point] prices at $6.16/MMBtu, assuming a tolling fee at $2.80/MMBtu and including LNG transportation costs from the U.S. Gulf Coast to Europe of $1.00/MMBtu, U.S. Henry Hub would have to trade below $2.00/MMBtu to be attractive for new European long-term contract buyers," they said. And for Asian markets, assuming transport costs of $2.60/MMBtu, Henry would have to trade below $2.20/MMBtu.

Henry prices aren't low enough to incentivise new Henry-based long-term contracts for supplies to either European or Asian destinations. "Put it differently, at current calendar-2016 Henry Hub prices of $3.00/MMBtu, UK NBP and Asian spot prices will have to trade above $7.25/MMBtu and $8.85/MMBtu, respectively, to attract new long-term contract buyers," BofA said.

And global demand for LNG has been weakening in Japan, South Korea and India, the analysts said.

Nevertheless, Cheniere Energy's Sabine Pass terminal, which is expected to be online by the end of the year, is well positioned cost-wise relative to many other liquefaction projects, especially those in Australia, the analysts said. "Most of the [Sabine] sales arrangements, especially to Asian customers, are take-or-pay contracts," they noted. These include fixed tolling fees plus 115% of the Henry Hub price and transportation costs.

Tolling fees in the Cheniere contracts vary: $2.25/MMBtu in a contract with BG Group signed in 2011; $2.49/MMBtu in a contract with Spain's GNF, which was signed a month later; and $3.00/MMBtu in a contracts with South Korea's Kogas and Centrica, signed in early 2012 and early 2013, respectively, the analysts said. More recently, Cheniere contracted with Electricite de France using a European index (see Daily GPIAug. 13).

Only a portion of the Sabine capacity is held under these contracts, though, the analysts said. "Given current Henry Hub and international prices, Sabine Pass will not get more long-term contracts without a massive drop in the tolling fee," they said.

The remaining capacity at Sabine may serve the spot market and would go to Europe, the analysts said, but they added that the spread between U.S. and European prices would likely narrow over time as U.S. prices rise and European prices fall. The same is true of exports from the United States to Asia, they said.

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