​Oil crash is a double-edged sword for LNG with projects at risk

Oil’s rout may have been an unexpected boon for the biggest buyers of liquefied natural gas, but its knock-on effects may come back to bite.

That’s because more than a dozen proposed LNG export projects from the U.S. to Mozambique are at risk of being delayed or scrapped as crude careened to levels that make most of them unprofitable. If fewer of them come to fruition, that would ease a widening supply glut later this decade and potentially lift prices amid breakneck demand growth in Asia.

Almost 20 proposed export plants are vying for a shrinking pool of capital after a record number of terminals reached final investment decisions last year. Even before crude’s drop, developers were under pressure from a slump in global gas prices, milder winter temperatures and demand restraints from the coronavirus.

“With significant downward pressure on spot LNG prices and oil prices, it could be the double-whammy that really starts to make some projects seem uneconomic,” Jeff Moore, an analyst with S&P Global Platts, said in an email. “If oil prices stay low for much of this year, I would imagine it could have a material impact on supply projects looking to reach FID this year.”

Before oil’s recent crash, BloombergNEF had marked four projects as highly likely to reach FID in 2020, while another 15 were seen as potential candidates or “wildcards,” according to a report published last month. BNEF is currently reassessing the timeline for potential FIDs in light of the market crash and coronavirus outbreak.

The multibillion-dollar export terminals typically sell their output at a price linked to crude and much will depend on how long the rout lasts. While projects are financed based on long-term models because they take years to build and then operate for decades, if oil and gas prices stay at current levels throughout the year, it could force backers and financial institutions to rethink their plans.

“It has been: ‘times are tough now, but the world will need this LNG, so we can’t let these short-term fundamentals affect the longer-term strategic decisions’,” Angus Rodger, a Singapore-based research director at Wood Mackenzie Ltd., said in an interview earlier this week. “If we continue rattling at the bottom, it will have an impact at some stage on companies’ willingness to make large capital commitments.”

Most developers are looking to sell LNG at $8 per million British thermal units, which has become difficult under market prices, according to Trevor Sikorski, head of natural gas, coal and carbon at London-based industry consultant Energy Aspects Ltd. Brent crude’s forward curve shows oil hitting about $55 per barrel by 2029, a price level that isn’t profitable for any of the proposed LNG projects, except for a planned expansion in Qatar, according to Sanford C. Bernstein & Co.

On the flip side, fewer LNG projects taking FID in 2020 and 2021 will likely translate into lower global supply between 2024 and 2027, Giles Farrer, research director at Wood Mackenzie, said Wednesday in a report.

“This drop in supply could be good news, as this ultimately will help bring the market into balance,” Sanford C. Bernstein analysts said Thursday in a report. “And the longer it takes for projects to be approved, the better the price recovery will ultimately be for the market.”

Futures for the Japan-Korea Marker, a benchmark for LNG delivered to northern Asia, are down about 50% over the last year to $3.140 per million Btu. Meanwhile, an LNG contract with a 12 per cent slope to Brent crude is currently at about $3.93, compared with $8.27 in early January.

“Companies looking to sanction new investments, both large one and smaller ones, will be running them on a much lower scenario, at least in the short term,” said Woodmac’s Rodger. They will be making “decisions based on maybe lower oil price scenarios. In which case a lot of investments just won’t happen.”

© 2020 Bloomberg L.P.

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