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10 Reasons Why JPMorgan Is Apocalyptic On The LNG Market

Tyler Durden's picture




 

With supply set to increase meaningfully over the next few years, JPMorgan sees a buyer's market until 2020 with limited new long term contracts being signed and renewal of existing contracts post expiry likely to have more price diversification (i.e. more Henry hub component) and offtake/diversion flexibility. A recent trip to Asia identified 10 key themes reinforcing their bearish outlook on the LNG market for the rest of the decade.

Excess capacity forecast to grow to 20% by 2018...

 

#1: Asia LNG demand slowdown confirmed

All participants shared a cautious view on near-term demand trends, with Japan and South Korea likely flat to down and China gas demand growth having slowed this year. In Japan, population and economic trends are the main driver of lower electricity demandgrowth, with some nuclear facilities expected to restart that will initially lead to fuel switching away from burning oilproducts, then eventually coal and LNG, if enough reactors start back up(Tepco guided 1GW nuclear plant reduces LNG demand by 1.2mtpa). KOGAS believes LNG imports will decrease in South Korea next year owing to coal and other commodities beingcheaper and could seea stagnant demand period from FY17.

#2: Lower FY15 gas demand growth in China – potentially a one-off

Many participants in the Chinese natural gas market saw the collapse in gas demand growth this year as "an anomaly", partly relatedto market uncertainty on pricing and frequency of change. Many industry contacts see mid to high single digit gas demand growth in the long term especially if the government is serious about environmental measures and penetration of gas into China's energy mix –China has already been shutting coal power plants which were only commissioned in 2008. PetroChina sees gas demand growth at 2.6% this year at 184bcm in 2015, rising to 300bcm in 2020 (implying 10% pa). (Note: 1H15 PetroChina still makes a loss on pipeline gas of Rmb0.38/cm3 or c$2/mbtu vs a loss for LNG of Rmb1.8/cm3 or c$10/mbtu).

#3: LNG still at a cost disadvantage vs alternative fuels

Long-term demand from fuel switching remains a potentialoption, but cost competitiveness is still key for now. When it comes to the potential for fuel switching to natural gas, we came away feeling that this is likely to be a positive long term driver, although it may not happen as quickly more likely the next1-3 years. In Japan, one smaller customer is actually still investing ina new coal power plant. However, the companyacknowledged that this would likely be the last coal facility that itwould consider, as future regulatory changes could add to the cost. For now, coal remains highly competitive.

#4: Lack of customer desire for new contracts

On the supply side, there is a wall of new capacity of 75mptaFY14-17on its way, mostly from Australia and the US–which is over 3x the equivalent capacitygrowth FY11-14. Customers in Japan andKorea were still committed to signing agreements, noting the importance of long-term supply security with reliable suppliers. KOGAS does not plan to take on any new long-term contracts until 2020 and will re-negotiate some of its Qatar/Oman contracts which expire in early 2020s. JERA, a 50/50 Tepco/Chubu established to be a more globally competitive powergen and gas business, stated it would only sign LNG agreements from 2020+ as existing contracts expire (eg Qatar). However, there was a desirefrom Asia buyersto exercise destination flexibility clauses where possibleand should supply/demand balances change in the coming years.

#5: Large projects still expected to FID

Despite the near-term supply/demand and pricing situation, some suppliers appear to have not thrown in the towel on sanctioning new projects for the 2020+. JGC expects orders for large LNG projects e.g. Mozambique (floating/onshore);Tanzania with selection of contractors this year; Tangguh expansion with FEED being conducted with selection of EPC by year end as well as Lake Charles and is “strongly hoping” Shell/BG will go ahead with LNG Canada. Chiyoda is also not only doing FEED, but also EPC and hashigh confidence in the project as well. KOGAS isfinding it difficult to findbuyers for Mozambique, but re-iterated FID by year end or early 2016for the project. If these projects (eg West Coast Canada LNG) are sanctioned and approved by local governments (also still uncertain), this may delay the longer cycle recovery potential.

#6: Europe – the market of last resort

With near-term excess LNG supply, the question remains where spot cargoes will land. We believe that the US and Qatar could increasingly look to the European market as anoutlet valve, given geographic proximityand gas storage availability. While European gas prices have already been weak (UK National Balancing Point (NBP) index down 22% y/y), the economics of sending Henry Hublinked gas to Europe (Henry Hub * 115% + transport) remainsattractive and suggeststhat future upside to European spot prices could be capped and, at worst, more downside may be ahead with the risks that Gazprom responds to maintain market share.

#7: Increasing LNG pricing diversification

Asia LNG buyers clearly want to obtain more pricing flexibility within their LNG portfolios and most buyers suggested a gradual move away from JCC (Japanese Crude Cocktail) pricing. JERAexpects to increase the portion of non-JCC linked contracts. By 2020, JERAexpects10mtpa procured based on Henry hub for long term contracts (vs 25mtpa procured today with a third spot/short term). JERA also will select producers based on 1. Offtake volume, 2. Destination flexibility; 3. Supply availability, not only price. KOGAS also said its pricing strategy will take a flexible approach on existing contract expiry(eg 50% JCC/50% Henry hubmix). JAPEX has also noticed a change in customer pricing toward a mixed/hybrid structure.

#8: Eco-ships taking time

NYK seeslimited recovery in spot dayrates for LNG vessels in the next 1-2years, but as liquidity increases and more projects eventually get sanctioned there should be more opportunitiesin LNG shipping (the company expects to expand its 69 LNG fleet to 100+ by 2019). Most of the company’s current vessels are steam turbine. Under current technology, NYK suggested it is not easy to replace vessels to natural gas as infrastructure is notalways available tofill up at ports hence NYK will soon have its own LNG bunkering vessel in Europe. The company believes that while the eco-ship theme remains structural with more environmental measures being put in place for shippingfuel, the pace of natural gas substitution has been slowed a little with lower oil prices.

#9:Australian LNG projects around mid- to single-digit IRRs at current oil price

Despite most Australian LNG projects being at the upper end of the cost curve, many companies were guiding mid-to single-digit returns for these projects at current oil prices, which was a surpriseto us. KOGAS stated that if the oil price remains at $50/bl (using a 6% discount rate) the companyis not likely to take impairment on its Australian LNG projects (GLNG, Prelude). KOGAS see its Australia GLNG returns at c6% and Prelude at 7-8% at current oil prices (both previously around 9% in a higher oil outlook). INPEX guided only anIRR decrease by 1% from previous 1010% IRR at $70-100/bl for Ichthys. The company also stated anIRR at $60/bl would be below 9%, although project breakeven point is around $30-40/bl.

#10: Wait and see approach for FLNG and LNG FSRU

There was a cautious view on the outlook for FLNG and LNG FSRU with the market waiting to see if Petronas demonstrates FLNG works then more projects will start to be sanctioned and more small-cap players may join the market i.e. small LNG solutions vs mega projects. Shipbuilders such as DSME remain in “tough” negotiations with producerse.g. Eni for Mozambique. DSME know the costs for FLNG from Petronas FLNG (and know thelessons learnt, e.g higher than expected working volume, i.e man hours). However, DSME expects60 months from contract signing to delivery for FLNG (Eni or Anadarko Mozambique) and itsyard could cope with signing two contracts for two FLNG vessels. Keppel, which is half way through a conversion for Golar,is still talking to other producers about new contracts and believes vessel conversion is still economic at current oil prices. However, some E&C companies believe NOC’s do not like FLNG and prefer onshore LNG as there is no ownership if FLNG.

*  *  *

And to nail the coffin shut one more time, they add, Coal is still consistently cheaper than natural gas or oil products...

 

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Sun, 10/04/2015 - 13:00 | 6628295 38BWD22
38BWD22's picture

 

 

Qatar might indeed want to look very hard at supplying Europe with LNG at a low price and with very long-term contracts.

#Winnerz

 

EDIT:

1)  It does not matter if Asia's demand is down, should Qatar and the USA  decide to export large quantities of LNG to Europe.  USA wins, Qatar wins, Europe wins.

2)  The USA ought to take advantage of this wonderful gift of lots of NatGas.  It's time to start converting much of our fleets over to gas.  Peru did so years ago.  We could too.

Sun, 10/04/2015 - 16:33 | 6628972 Squid-puppets a...
Squid-puppets a-go-go's picture

once again , though, the energy invested in warring against syria will not be returned with gas at these prices

Sun, 10/04/2015 - 19:00 | 6629283 Joe Trader
Joe Trader's picture

A brand new LNG port is coming online in Poland & have long ago opened negotiations with Qatar..

Sun, 10/04/2015 - 20:52 | 6629568 cheka
cheka's picture

FOSSIL fuels.  another big lie.  true scarcity requires no cartel.  nyc.opec is all about creating artificial scarcity

Sun, 10/04/2015 - 23:38 | 6629920 TheCentralScrut...
TheCentralScrutinizer's picture

Qatar is going to face huge competition from that new NatGas field they discovered off of Egypt.    Why ship from the Persian Gulf when the distance is so much shorter from Egypt?

In addition, Israel has it's gas fields coming on line as well, providing another source of NatGas for Europe.

Scrutinizer

Sun, 10/04/2015 - 12:27 | 6628309 CHX
CHX's picture

10 bearish reasons to expect a RALLY.

Sun, 10/04/2015 - 13:09 | 6628441 bigdumbnugly
bigdumbnugly's picture

Bullish.

Sun, 10/04/2015 - 12:39 | 6628348 Latitude25
Latitude25's picture

After years and years hearing about the shortage of oil and gas and why the world was running out and how energy prices would go higher and higher, now we get non stop propaganda that there is a glut of energy since the Russians seem to have more than anyone else.  Availability and price of energy appear to be nothing more than corporate propaganda.

Sun, 10/04/2015 - 12:53 | 6628403 Bill of Rights
Bill of Rights's picture

Yup all bull shit, this is a go long signal if there ever was one .

Sun, 10/04/2015 - 18:56 | 6629266 Joe Trader
Joe Trader's picture

I quote, and present with no comment:

 

@realDonaldTrump: "Sad--OPEC has really cornered the market. Now lauds $85/barrel Crude shouldn't cost more than $25." -Donald Trump,

Mon, 10/05/2015 - 06:39 | 6630262 BigJim
BigJim's picture

 Availability and price of energy appear to be nothing more than corporate propaganda.

Corporate propaganda? Most of the oil we consume is produced by state owned enterprises.

Sun, 10/04/2015 - 14:50 | 6628735 Hohum
Hohum's picture

Are these the same guys that predicted a shale oil boom until 2025?

Sun, 10/04/2015 - 15:05 | 6628768 farmerbraun
farmerbraun's picture

That is not all.
The idea that CO2 from coal burning is a problem has taken a huge hit ; not just from reality refusing to conform to the IPCC models , but now also from the elucidation of what was fundamentally wrong with those models , and why they overstimated the heating effect of atmospheric CO2 by a factor of 5-10.

http://www.news.com.au/national/western-australia/miranda-devine-perth-e...

Sun, 10/04/2015 - 20:06 | 6629449 Spore
Spore's picture

To bad the knuckle heads in power dont make a major push for lng or png gas cars. Clean burning and CHEAP!!

Sun, 10/04/2015 - 23:06 | 6629872 Tachyon5321
Tachyon5321's picture

To bad lng and png cars go less than 150 miles per tank. So you will need to fill up 3 times a week.

Sun, 10/04/2015 - 23:36 | 6629918 TheCentralScrut...
TheCentralScrutinizer's picture

That's not necessarily the case.  It all depends upon the size of tank you have installed, AS WELL AS the pressurization.

The normal pressue in a CNG tank is around 3500/psi, but there is no reason, with current carbon fiber tank technology, that the pressure cannot be increased to 5,000 to even 10,000 PSI..   The primary obstacle are the pumping stations.

And for "big rig" uses, there are plenty of storage options that are equivlent to current diesel tanks..  

And with NatGas prices per MBTU sitting at $2.46 (with 6 MBTU per Barrel of Oil Equivalent) we get around $15/BOE compared to oil.   So oil can go quite a bit lower still and CNG/LNG has a cost advantage.

So with NatGas landlocked in the USA, and the Mid-East turmoil increasing with Russian and Iranian presence in Syria, NatGas in the US will likely continue being marketable for vehicular use.

A lot of big fleet owners are increasing their inventory of CNG/LNG rigs..   Just give it more time as more LNG/CNG fueling stations are deployed.   And increase the pressurization of the pumps and tanks and it will become even more attractive, WITHOUT sacrificing safety..  (CNG tanks have been tested with .30cal Armor Piercing bullets and not been penetrated)..

Scrutinizer

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