Why Is The LNG Market Weak?

|
Includes: CQH, CQP, LNG
by: Alerian

By Karyl Patredis

Click to enlarge

"You can never have too much of a good thing" is a phrase you've likely heard before. We can probably all agree that this statement breaks down in many instances. You can definitely have too many carbohydrates [1]. It's highly debatable if too much money is actually a thing. Some lottery winners would tell you it is, but I'd be willing to roll the dice.

Liquefied natural gas ((NYSEMKT:LNG)) is most certainly a good thing. When LNG is regasified [2], the natural gas is used for heating and power generation, which produces less CO2 [3] when burned and is widely viewed as a cleaner fuel option than its counterparts. However, it turns out that LNG and carbs have something in common, you can have too much.

In February, the Cheniere family of companies (LNG, CQH, and CQP) [4] celebrated as the first ever LNG export left their Sabine Pass terminal for Brazil. This is undoubtedly positive news and a reason for optimism at Cheniere. However, one good day where I can magically fit into my "pre-baby jeans" doesn't necessarily mean my carb consumption is under complete control. And, unfortunately, this one bit of good news doesn't necessarily mean the LNG industry is perfectly healthy either.

Asian demand, which represents more than 70% of worldwide demand for LNG, has dropped significantly due to weakening economies. After years of double-digit LNG demand growth, China's LNG imports fell by 1% in 2015. Shipments to Japan, one of the largest LNG markets, fell by 4%.

Along with pullback in demand, LNG export terminals are popping up like Texas bluebonnets in April [5], making the supply/demand imbalance worse. Sabine has further LNG trains coming online and four additional export terminals are currently under construction in the U.S.: Cove Point, Corpus Christi LNG, Cameron LNG, and Freeport LNG. Along with these, there is one terminal in Lake Charles, Louisiana that has been approved by the Federal Energy Regulatory Commission (FERC) but has not yet gone under construction. And then there's a list of proposed export terminals that have not been approved by the FERC.

Clearly, the environment has changed since the proposal of many of these projects. Not only do these U.S. terminals have to compete with each other, there are also foreign terminals being completed. For example, at the end of 2015, two terminals were finished in Australia: Gladstone LNG and Australia Pacific LNG. This brings Australia's number of LNG export terminals to seven. Not to mention, there are three more projects already under construction slated to come online: Wheatstone in 2016, Ichthys in 2017, and Prelude, the world's first floating LNG project, in 2020. This leaves the world with more options, and the added competition is simultaneously adding pricing pressure.

At this point, LNG exporters must consider all options to keep their businesses afloat. While there was a time when the U.S. had a pricing advantage, LNG exporters around the globe are more or less now on equal footing since the price of oil has pulled back dramatically. (Historically, global LNG prices have been linked to oil prices, whereas U.S. contracts typically linked LNG prices to natural gas prices.) Many are turning their attention to South America where there is a growing interest in LNG. Some are offering more flexible contracts. For example, KPMG notes that some sellers may remove destination restrictions or allow for spot resales. Shorter contract terms with more competitive prices are also likely on the table. Other sellers are offering sales prices linked to different indices, such as the Dutch Title Transfer index (TTF), a European natural gas pricing index.

As usual, I'm not a huge fan of ending my posts on a sour note. Word on the street is that South America may not be the only place where LNG is getting more attention. Demand is also reportedly growing in Egypt, Jordan, and Pakistan. It's not all bad, and hopefully as we pull out of the pits of this energy cycle, we'll see the LNG supply/demand equation normalize. When [6] that days comes, we will all celebrate wildly … with burgers. Burgers with thick, carb-filled buns.

Footnotes:

[1] Which is why I’m currently on the Atkins Diet. I’m on day nine of 14. GIVE.ME.SOME.CHEETOS.

[2] LNG is the liquefied form of natural gas and is easier to transport than natural gas.

[3] Carbon dioxide, which is considered a greenhouse gas (GHG). GHGs lead to the greenhouse effect. Most climate scientist agree that global warming is due to human expansion of the greenhouse effect.

[4] Cheniere Energy, Inc. (LNG), Cheniere Energy Partners LP Holdings (NYSEMKT:CQH), and Cheniere Energy Partners (NYSEMKT:CQP).

[5] Okay, maybe not THAT fast. If you’re not a Texan, Google “Texas kids in bluebonnets” and look at the images. It’s a statewide phenomenon, y’all.

[6] If

Disclosure: © Alerian 2014. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers.

Karyl Patredis is the Logistics Coordinator at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Patredis leads the firm's ongoing efforts toward greater organizational efficiency. She also oversees Alerian's feedback process for creative output. Ms. Patredis graduated with a Master of Science in Accounting and a Master of Business Administration from the University of Dallas, as well as a Bachelor of Arts in Communication and a minor in Psychology from Texas A&M University.