The news of an extended outage at the US Freeport LNG terminal is a major issue for the Asian LNG market, exacerbating tight global market fundamentals as regional term customers of the terminal will be forced to seek alternative supply in competition with European buyers, market sources said June 15.
One source with an Asian term lifter of Freeport LNG described the extended outage as a “total disaster,” noting that it would support prices in both the European and Asian markets well into the second half of the year.
The Platts JKM for July delivery rose to $28.927/MMBtu on June 15, up $4.827/MMBtu day on day, according to S&P Global Commodity Insights data. The European benchmark TTF month-ahead price was trading around Eur100/MWh early June 15, according to ICE data.
The announcement by the Freeport LNG terminal’s operator of a minimum 90-day suspension of exports from the three-train facility sent shockwaves through the global gas market June 14, with US prices falling and prices in Europe and Asia in reaction.
The Freeport facility has been offline since a fire June 8, backing up about 2 Bcf/d of feedgas into the Gulf Coast gas market. Freeport LNG had initially said the facility would be offline for at least three weeks.
“Initially [the Freeport LNG] impact was going to be more focused on the Atlantic but [now there is a] big question of what is the long-term impact of Asian summer,” said a Singapore-based trader, adding that it would be interesting to see how Asia’s term lifters from Freeport — South Korea’s SK E&S and Japan’s JERA and Osaka Gas — would behave now.
The outage extension is likely to force those Northeast Asian term buyers to seek alternative procurement at a time when Europe — already facing heightened supply uncertainty due to the fallout from the Ukraine crisis — is providing strong competition for cargoes.
Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp, or Jogmec, noted that the extended Freeport LNG outage would intensify competition between Europe and Asia for securing LNG cargoes as regional end-users are stepping up procurement for the next winter demand season.
“In the wake of the supply suspension of US Freeport LNG, which has been exporting a significant amount of spot LNG to Europe for restocking inventories for the next winter demand season, Europe’s move to secure alternative supply source would intensify Asia’s, including Japan’s, competition with Europe [which will] tighten the LNG supply and demand balance relatively speaking.”
Lifters assessing impact
SK E&S, which lifts about 2.2 million mt/year of Freeport LNG, did not comment officially but a source close to the company said it was currently evaluating the impact of the outage on a month-by-month basis, calculating whether it needed to buy spot cargoes. “Each month has a different story right now,” said the source, noting that for some months the company would be long, but for others it would be short.
Japan’s JERA and Osaka Gas both said June 15 they would procure alternative LNG supply to make up for the shortfall from the Freeport terminal in the US after its operator advised that the fire-hit facility would suspend exports for at least 90 days.
“While we are still in the midst of verifying the impact on our LNG procurements, we will respond with alternative procurements from other projects to make up for expected LNG [losses] from Freeport,” a JERA spokesperson said.
Osaka Gas expects it will need to procure alternative LNG cargoes from other projects and spot procurements to make up for the Freeport supply loss in order to ensure stable supply for the domestic market, a company spokesperson said.
JERA and Osaka Gas each lift 2.32 million mt/year from Freeport LNG.
In Japan, power utilities have been stockpiling LNG for the country’s summer season beginning in a few weeks, building a relatively high LNG inventory level.
LNG stocks held by Japan’s major power utilities extended gains to a 23-week high as of June 12, rising 7.9% week on week to 2.31 million mt, the Ministry of Economy, Trade and Industry said June 15.
Heightened European sensitivity
Jeff Moore, manager of LNG Analytics Asia at S&P Global Commodity Insights, said that the extended outage was likely to have “a relatively muted direct impact on the Japanese market” because not many Freeport exports had actually landed in Asia in recent months.
“That said, it will likely mean Europe will need to replace the supplies from elsewhere, meaning less potential supply to make its way to Asia especially as we move into the core cooling season where temperatures could start to support demand.”
Citigroup analysts concurred that the European market was likely to be most affected, but that the impact would be felt globally.
“Given very tight fundamentals in Europe and the uncertainty around the future of Russian pipeline natural gas exports, the European market could be more sensitive to supply shortages, along with the problem of not having sufficient data to establish a robust price-to-demand-curtailment relationship that could help to set prices more precisely,” Citigroup said in a report on June 14.
It said Freeport LNG’s 2 Bcf/d outage is equivalent to about 4% of total LNG supply globally, and about 2% of the US natural gas market.
This means that the impact on the US market and on the European gas/global LNG market should be mirror images of each other, and all else being equal, the price plunge in the US should produce a similarly sized price increase in Europe and Asia, with price moves in Asian JKM similar to TTF price changes.
Source: Platts