The cash margin for the U.S. LNG exporters improved slightly in the second quarter. However, the trend will likely remain negative for 2020, according to a new report from the Oxford Institute for Energy Studies (OIES).
The global pandemic has affected the LNG market. Natural gas is in a glut that’s concerning both buyers and sellers. In Japan, the world’s biggest LNG importer and largest power generator, JERA, is the latest victim of the COVID-19 driven fallout in global energy prices, losing billions of yens. JERA had contracted to buy LNG at prices linked to crude oil. However, as it cannot use the gas, it typically resells some cargoes. The concern is that JERA has to resell cargoes on the spot market, where the prices are much lower than the oil-lined price. The result – the group is buying high, but selling low.
The worldwide LNG glut has placed more natural gas into storage. In Europe, due to elevated storage supply cuts are evident. The U.S., with its flexible contracting terms, is shouldering the burden of rebalancing.
U.S. LNG exporters have seen dozens of cancelled cargoes because of the glut. For companies like Cheniere Energy, their finances stand fairly protected as buyers need to pay fees even if they cancel the cargoes. On the other side of the globe, buyers are becoming anxious with an arrangement that has locked them into rigid agreements. In light of the financial losses for JERA, there’s an increasing need felt for more flexible contract terms. Hitoshi Nishizawa, a senior executive officer at JERA, said at a recent energy conference in Japan that long-term SPAs [sales and purchase agreements] with rigid terms are no longer suitable for a rapidly changing market.
Based on the OIES report, the markets could improve due to a very significant surge in Asian gas demand in 2021 or another round of LNG shut-ins to support the gas price. The report also forecasts margins remaining below levels that might signal new investment in new capacity through the end of 2023.
In Asia, market evolution has been a bit slower. However, the industry appears ready to speed up with the oil-linked price so detached from JKM spot prices.
The pandemic-related downturn is emptying investment in both oil and gas. The number of projects receiving final investment decisions is expected to fall by 75% in 2020, according to Rystad Energy.