The First U.S. LNG Exports from the Lower 48 Enter a Bust Market: A Look at the Implications

On February 24, Cheniere Energy’s Sabine Pass plant officially began exporting liquefied natural gas (LNG) when a tanker carrying 3.7 bcf of domestically produced LNG departed for Brazil. A second tanker docked on March 11, and at least eight more will follow in the next two months, each destined for the global LNG spot market. Sabine Pass is one of several LNG plants being built in hopes of capitalizing on the opportunity to ship cheap U.S. natural gas to regions of the world with significantly higher prices. Unfortunately, timing of completion appears to have missed the market with global LNG prices plummeting in recent months.

Key Details

  • Cheniere is the first of several companies in the United States with projects under construction: Dominion Resources, Sempra Energy, and ConocoPhillips. At present, their export terminals are under construction and due online between 2017 and 2019
  • Cheniere is scheduled to be the largest U.S. LNG exporter, with 6.3 bcf/d of LNG export capacity expected from its two terminals, Sabine Pass and Corpus Christi, by 2020—2 bcf/d more than its U.S. competitors combined
  • When first conceived in 2010, Cheniere’s strategy intended to act on the considerable spread between global LNG prices and domestic Henry Hub by producing at low costs and selling high using fixed contracts while still undercutting international competition; however, now that international LNG prices have plummeted due to decreasing demand and the collapse of oil prices, Cheniere will look to sell its uncontracted capacity into the spot market
    • Cheniere has secured six fixed-price, 20-year sales and purchase agreements with third parties, including BG Gulf Coast LNG and Korea Gas Corporation, that account for 87% of its 2020 export capacity
    • However, with current market prices, Cheniere is operating at a deficit of ~$1.40/MMBtu for contracted shipments to Europe and ~$2.15/MMBtu for shipments to Asia compared to spot prices
  • Increased LNG exports from Australia and Qatar have further “dumped” gas on an international market awash in gas
  • Even after refinancing more than $2B of its nearly $17B debt in February, Cheniere has yet to break even, with most analysts suggesting GAAP net income by 2018 at the earliest

Implications
While it was hoped that U.S. LNG shipments would be lucrative and provide upward price pressure in the United States, the drop in international gas prices have put a damper on these expectations. Cheniere’s first shipments, coupled with increased exports from Australia and Qatar, will increase supply and further drive international price convergence. These effects will only be magnified as other U.S. capacity comes online after finishing construction by 2020. As the global market continues to become more saturated and the supply glut increases, the prospect for success of U.S. LNG exports is dark and puts in question whether or not the LNG plants currently planned will be completed.

More Information

SNL Financial: First LNG Export Cargo Departing Feb. 24 for Brazil

SNL Financial: Commodity Prices Pose Risk to US LNG Use in Europe

SNL Financial: Cheniere’s Gamble on Exports Rewarded as First Cargo Completes ‘U-turn’

SNL Financial: Low Gas Prices Seen as Double-Edged Sword for US LNG

SNL Financial: Evolving LNG Market Expected to See New Trading Hubs, More Spot Trading

SNL Financial: LNG Tanker Docks for Second Sabine Pass Export Cargo

This report is part of the Gas Minute series. To view all featured Minutes, please click here.

Contributing Author: Chris Becker

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