With its abundant natural gas storage capacity, North America is viewed by many as a sink for liquefied natural gas (LNG) cargoes that can’t be sold in Asia or Europe. But now that new LNG liquefaction capacity is poised to come onstream later this year and next — in the midst of a global economic downturn — the industry is wondering where all the cargoes will go.
“If global demand declines and liquefaction projects come on-line as scheduled, neither the U.S. nor Europe would be in a position to take all excess LNG volumes in the second half of 2009,” analysts at Barclays Capital wrote in a research note Tuesday. “Thus we expect relative pricing to reflect the need to balance LNG flows between Europe and the U.S. later in the year.”
The analysts noted that prices at the United Kingdom’s National Balancing Point have sunk but still offer a premium to Henry Hub. “[T]he differential has narrowed to where some Atlantic Basin volumes should flow to the U.S. instead of Europe starting mid-2009.
“…Europe’s ability to absorb LNG supply above and beyond its immediate needs could hold the key to how much LNG lands at the U.S. shores in the second half of the year.”
The LNG industry has a history of missing targets for new liquefaction capacity, and a number of trains in operation have been beset by problems and are not operating at full capacity. Nevertheless, if the industry’s plans come to fruition, 2009 could see a record number of liquefaction facilities, growing nameplate capacity by 5.6 Bcf/d in a roughly 23 Bcf/d global LNG market, the Barclays analysts wrote.
Nigeria, for instance, could triple its output of LNG in a few years if projects slated to come on-line do so as planned, according to the head of Nigeria LNG, as reported Wednesday by Reuters.
Whatever capacity does come on-line will be arriving at the worst possible time from the standpoint of the global economy. The analysts concede that “the range of possible outcomes for global balances is unusually wide.” However, they wrote that a net decline in European and Asian demand for LNG this year appears to be likely. “Our estimates indicate that if European consumption decreases by 5% y/y [year over year], and Asian demand falls by 10% in H209, the resulting surplus LNG output would be roughly 1.3 Bcf/d in Q2, 2.9 Bcf/d in Q3 and 4.2 Bcf/d in Q4 y/y,” the analysts wrote.
According to data compiled by Tudor, Pickering, Holt & Co. Securities Inc., sendout from U.S. LNG facilities has been averaging 0.9 Bcf/d so far in February compared with about 0.8 Bcf/d a year ago. In the fourth quarter the average was also 0.9 Bcf/d as it was in the fourth quarter of 2007, the firm reported Monday.
“For 2009,” the Barclays analysts wrote, “the magnitude of the expected growth in supply, coupled with the sharp demand deterioration, means that a single regional LNG market is unlikely to be able to absorb all of the excess volumes, particularly in the case of a global demand decline.
“[T]he U.S. with its large storage base and flexible pipeline infrastructure could serve as a point of last resort for orphaned LNG cargoes. The trouble is that U.S. balances are also looking rather plush for the second half of the year, and incremental LNG imports threaten to depress prices even further.”
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