As demand for fuel falls, gas prices and output also take a hit

With economies worldwide grinding to a halt as virus-containment measures take their toll, oil is not the only fossil fuel to have suffered a steep decline in prices.

Demand from the world’s biggest buyers of liquefied natural gas (LNG) has plunged, dragging Asia’s spot prices to record lows and forcing some suppliers to start cutting output.

The world’s biggest LNG markets – Japan, China, South Korea and India – are all seeing a drop in demand for gas used in power generation, heating, cooking, vehicles and chemical manufacture. 

Asia’s spot LNG prices dropped to $1.85 per million British thermal units (mmBtu) last week, the lowest ever, as cargoes have flooded the market.

“At prices in the $2/mmBtu range … some producers are getting close to not recovering cash costs of their operations. We are likely to see some producers start to ‘shut in’ (production),” said Alex Dewar, a senior manager at the centre for energy impact at Boston Consulting Group (BCG).

Even in markets where lockdowns are starting to ease, such as in China and South Korea, containment policies elsewhere are hampering manufacturing exports and dragging on recoveries.

Oil prices that hit two-decade lows in April and are down more than 50 percent since end-2019 have exacerbated the problem. Asia – which takes 70 percent of global LNG exports – still buys most of its LNG in long-term contracts linked to oil prices. There is typically a lag of three to six months before the drop in oil prices is felt by buyers and sellers.

Although oil prices have slowly picked up as US inventories swell less than expected, analysts predicted that future gains could be capped by the continuing glut in crude supplies as the coronavirus pandemic crushes fuel demand.

Brent crude was up on Thursday by 0.4 percent to $29.84 a barrel at 00:44 GMT, after falling earlier in the Asian session and dropping 4 percent on Wednesday.

US oil gained 0.8 percent to 24.18 a barrel after declining more than 2 percent in the previous session.

Consultancy Rystad Energy still expects global LNG demand to grow nearly 2 percent this year to 359 million tonnes, compared with a 2019 growth rate of about 13 percent, although this could change depending on the weather and how fast lockdowns are lifted.

Demand drop hits US producers

In the United States, where LNG is at the high end of the typical cost curve according to analysts from consultancy Bernstein, capacity utilisation and intake have already declined.

“Already we have seen US liquefaction capacity utilisation fall and some cargoes rejected,” BCG’s Dewar said, referring to the capacity used by US LNG producers.

Gas intake at US LNG plants fell to 8.1 billion cubic feet a day in April, just below total nameplate capacity but down from a high of 8.7 billion cubic feet a day in February, according to data from Refinitiv. US plants typically take in more than their stated capacities because gas is also used to run the facilities.

“Our customers have made some modifications to their production and cargo loading plans … in response to current market conditions, but Cameron LNG is not at liberty to discuss those details,” said Anya McInnis, spokeswoman at Cameron LNG.

Processors Freeport LNG and Kinder Morgan declined to comment on the operations of their customers, who pay US plant operators to process natural gas into LNG for export.

Those customers – including units of GAIL (India) Ltd, France’s Total, and Japan’s Sumitomo Corp and Mitsubishi Corp – did not immediately respond to requests for comment. Mitsui & Co Ltd said it could not comment on its deals.

Indications are that US LNG exports are falling beyond what is expected from the end of winter, and that demand loss could continue through the summer. Buyers in Asia and Europe have cancelled about 20 cargoes for loading in June.

This week, US natural gas prices topped benchmarks in Europe and Asia for the first time ever, giving LNG buyers another reason to cancel cargoes.

The largest US LNG processor, Cheniere Energy Inc, said in its first-quarter earnings it has “recently experienced an increase in the number of LNG cargoes for which our customers have notified us they will not take delivery”.

Cheniere also said it expects new project investment worldwide to slump this year and next due to a 30 percent drop in world energy demand.

Dominion Energy Inc’s CFO James Chapman said customers for his company’s Cove Point LNG plant “continue to nominate volumes that are at the plant’s design capacity”.

The US is the world’s third-largest LNG exporter, behind Qatar and Australia, with Russia in the fourth spot, according to the latest report by the International Gas Union. 

Last month, Qatar Petroleum (QP) said it is planning to continue its expansion plans despite the pandemic.

In an interview with the Reuters news agency, QP’s chief executive officer Saad al-Kaabi said the company could seek to raise debt next year for its domestic North Field LNG expansion, the world’s largest LNG project.

Qatar is one of the most influential LNG market players with an annual production of 77 million tonnes. It plans to increase its LNG production to 126 million tonnes a year by 2027.

Al-Kaabi said QP will postpone the start of production from its new gas facilities until 2025 following a delay in the bidding process, but is not downsizing the North Field expansion.

“We are still going to expand externally. We have always focused on upstream assets and … we are still interested in going ahead abroad,” al-Kaabi said in a video conference interview.

Global pressure

But others are feeling the heat. Beyond high-cost US producers, some Australian coal-bed methane projects are also likely to face acute pressure to cut supply, BCG’s Dewar said.

Australia’s coal-seam gas (CSG) projects have some of the highest output costs in the world, although Australia Pacific LNG and Santos Ltd say they have slashed their CSG costs in recent years.

Australia Pacific LNG partner Origin Energy said it sells most of its output in long-term contracts, with a small percentage going via pipeline to Australia’s east coast or to Asia as spot LNG.

The joint venture – owned by ConocoPhillips, Sinopec and Origin – is considering whether to trim spot volumes. This would entail cutting output from the CSG wells, not shutting down a train at Australia Pacific LNG.

“We’re talking about what would be the economics of running less volumes and the cost of that … if there are extremely low spot prices,” Origin Energy Chief Executive Frank Calabria told Reuters news agency in an interview on May 1.

Woodside Petroleum Ltd, Australia’s top independent LNG producer, said it is difficult to cut LNG volumes because long-term contracts, which make up 80 percent or more of a plant’s output, are set for loading and delivery on an annual basis.

Still, Santos, which operates the Gladstone LNG (GLNG) plant, and Origin Energy at APLNG said in their quarterly reports last month that customers had opted to take lower volumes this year, as allowed in their contracts through “downward quantity tolerances”.

Malaysia’s Petronas has also curtailed some LNG production, two industry sources said, while Royal Dutch Shell’s Prelude floating LNG facility shut its production in February after an electrical trip and appears in no hurry to start it back up.

Petronas did not respond to a request for comment and Shell declined to comment on Prelude.