ICRA: Sharp Divergence In Spot And Long-term LNG Prices Is Credit Negative For Long Term LNG Marketeers
The Asian spot LNG prices have declined precipitously from $9-10/mmbtu in December 2018 to about $4/mmbtu now, owing to a supply glut as 30 million tons of new liquefaction capacity is to be added in CY2019 primarily in Russia and the US. This incremental capacity is above the 41 million tons of nameplate capacity added in CY2018 and thereby ramped up production. Accordingly, about 70 million tons of LNG supply is expected to be added over 2018 and 2019 as compared to net exports of 290 million tons in 2017 and 314 million tons in 2018 or about 3 times the increase in consumption during 2018. The prices had remained elevated during CY2018 driven by strong Chinese demand as the country partly replaced coal with natural gas as a key source of energy to combat pollution.
Commenting on the impact of lower gas prices Mr. K. Ravichandran, Senior Vice-President & Group Head, Corporate Ratings, ICRA said “Owing to the supply glut, spot prices are expected to remain in divergence with crude oil driven long-term LNG prices. As against FOB spot price of ~$4.0/mmbtu, current price of long term RasGas LNG would be more than double at ~$9.4/mmbtu (FOB basis) and of Gorgon LNG at ~$9.6/mmbtu (DES basis). As prices of crude oil have not declined as much as spot LNG due to different supply demand dynamic of the two commodities, the price of LNG derived from crude oil is elevated. The materially lower prices of spot LNG as against long term LNG is expected to lead to consumers across different industries viz. power, fertilisers, refineries, petrochemicals, steel and tiles maximising their spot purchases and cutting down the purchase of long term LNG. Accordingly, consumers may not offtake the entire long-term LNG quantity committed by them as per the gas sales purchase agreement (GSPA) signed with the offtakers. With lower offtake by end consumers, aggregators such as Petronet LNG Limited (PLL), GAIL and GSPC would be forced to offtake equivalent lower quantities from LNG sellers. This could result in piling up of large ‘Take or Pay’ liabilities for buyers (and in turn the offtakers and ultimate end consumers, as the risk has been fully passed on a back to back basis across the supply chain) for CY2019, as per the SPA signed with LNG sellers.”
Moreover, prices of liquid fuels (FO, LSHS, Naphtha, Bulk LPG) derived from crude oil will also remain cheaper as compared to long term LNG, as the price revision generally happens on a fortnightly/monthly basis, whereas long term LNG prices track crude prices with a 3-month lag. This could result in some pressure on the marketing margin of LNG marketers, especially since crude prices have corrected sharply to around $60/bbl from $70/bbl in May end. Moreover, there could be inventory losses on a Mark to Market basis resulting in softening of trading margins. Volume growth will also be under pressure as the ultimate end consumers would opt for downward flexibility in offtake volumes, provided in the offtake contracts. Nonetheless, spot LNG prices are known to be volatile and seasonal, which could offer some respite to the marketers when prices recover once the winter season sets in.