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    Editorial: Winter recovery [LNG Condensed]


Having seen spot LNG prices in Asia-Pacific sink below $2/mn Btu at the end of April to an all-time low, the rebound in recent months to above $6.5/mn Btu in October for December delivery will come as a welcome relief both to LNG sellers and project developers. [LNG Condensed Volume 2, Issue 7 - November/December 2020]

by: NGW

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Editorial: Winter recovery [LNG Condensed]

The rise is the result of a combination of supply-side limitations, seasonal demand and more structural underlying factors, which have together tightened the Asian market for LNG more than might have been expected in the summer at the height of the pandemic.

On the supply side, a serious fire at Hammerfest LNG at the end of September closed down production at the 5.6mn mt/yr plant. Operator Equinor has warned that it might not come back into operation until October 1, 2021. The fire caused damage to the air intake system, while seawater that was used to extinguish the fire damaged other auxiliary systems such as electrical equipment and cables.

The loss of Norwegian LNG was compounded by lower gas flows by pipeline from Norway as a result of strikes, reducing supply into European markets.

Meanwhile, US LNG supplies have also suffered interruptions both to general gas supply as a result of hurricane-related shut-ins on the Gulf Coast and a sunk semi-submersible rig in the Sabine Pass shipping channel and a sunk barge in the Calcasieu Channel disrupting LNG vessel movements. Operators in the US Gulf of Mexico shut in 1.5bn ft3/day of natural gas production as tropical storm Zeta approached in October.

The US upstream has shown substantial adjustment as a result of the Covid-19 pandemic and loss of export and domestic demand earlier in the year. Baker Hughes data puts the number of active gas rigs on November 20 at 76, up 3 from the week before, but 39% lower than at the same point last year, when 129 rigs were actively drilling for gas.

Demand for LNG feedstock has risen as the spread between Henry Hub prices and Asian spot prices has widened, but upstream producers reining in activity this year means that rather than enter the winter season with stocks at record levels, US gas in storage is now within the five-year historical range, albeit 293bn ft3 above year ago levels.

These disruptions to supply have coincided with northern hemisphere winter buying, which has been buoyed by expectations of lower than average winter temperatures in northern Asia. As a result, Asian demand was relatively robust in September, even if Japanese October imports dropped 5.7% year on year and 8.6% month on month, according to provisional data.

The prospect for South Korean imports looks good, owing to seasonal measures affecting coal-fired generation. The government intends to suspend the operation of as many units as possible and impose an 80% cap on operating units between December and March in an effort to reduce air pollution.

This will coincide with a delay to the 1-GW Hanbit 5 nuclear reactor returning to service. Previously expected back on line November 17, maintenance will now last until the end of February.

Most importantly, however, underlying all of this is a strong recovery in Chinese gas demand. Despite Covid-19, Chinese LNG demand rose 10% year on year in the nine months to end- September as low prices made it the cheaper option compared with pipeline gas imports. Further coal-to-gas switching in China’s northern provinces may also provide support to China’s LNG demand as early as this winter. 

As ever, though, it will the severity or not of the northern hemisphere winter that determines prices over the coming months amidst an overall picture of oversupply, as a result of ongoing capacity additions and weaker demand, owing to the pandemic, which has seen a second round of lockdowns imposed in Europe. Whatever the winter brings, this short-term excess of production capacity is likely to reassert itself as the northern hemisphere summer approaches next year.