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My Bear Case For $GLNG

Summary

Supply exceeds demand.

Lower LNG prices and lower charter rates.

Final Investment Decisions delayed or cancelled.

Lower seaborne LNG transportation : pipelines to China & Europe.

Nuclear Energy in Japan & renewable energy in Europe.

Bear Case for GLNG :

The biggest risk for GLNG is that LNG-prices  (and by extension oil prices) substantially decline from current levels :

H  

Source: International Monetary Fund, World Bank, companies' reports.  (Bluegold research)

LNG prices per 2018-10-01 stood at $ 11.4/mmBtu in China & Japan and at $ 9.6/mmBtu in the UK and $9.9 in Spain. 

https://about.bnef.com/lng-outlook :Here you can find an interesting analysis about supply & demand for LNG.

Important to note that in 2020-2021 only 86% average utilisation rate  in export plants is expected.

Add to this possible (probable) pipeline utilisation from Russia towards China and Germany (and by extension the EU) and demand for seaborne LNG transportation  will slow further.

Moreover there is a growing investment & use of renewables in Europe.

Japan will reopen the 9 th nuclear plant.

All this means that demand for LNG could possibly be lower (and probably be lower)  than the new supply coming to the market).

These lower prices will also influence the FID’s that are in the pipeline.

The nex table gives us an idea about the minimum breakeven costs for new LNG projects. Ex-Quatar break even goes from $ 6.66 to …..$$ 9.67/mmBtu !

$/MMBtu

Feedgas

cost

Liquefaction

cost

Transport

cost

Regas & Grid Entry

Total

cost

Qatar (high Liquids Yield) to Asia

-2.5

2.5

0.81

0.81

Qatar (Barzan reported yields) to Asia

1.5

2.5

0.81

4.81

US Brownfield to Europe

3.3

2.0

0.67

0.69

6.66

US Greenfield to Europe

3.3

2.5

0.67

0.69

7.16

US Brownfield to Asia

3.3

2.0

1.52

6.82

US Greenfield to Asia

3.3

2.5

1.52

7.32

Russia - Yamal2 to Europe *

2.0

3.5

1.60

0.69

7.79

East Africa - Lowto Asia

3.0

3.5

0.86

7.36

East Africa - High to Asia

3.5

4.0

0.86

8.36

Australia Expansion - Low to Asia

4.5

3.5

0.51

8.51

Australia Expansion - High to Asia

5.0

4.0

0.51

9.51

Canada to Asia

4.5

4.5

0.67

9.67

Charter Costs

Fuel Costs

Canal Costs

Other Costs

Total

US Gulf Coast - UK

0.40

0.16

0.00

0.11

0.67

US Gulf Coast - China (via Panama)

0.78

0.39

0.20

0.14

1.52

Qatar - UK (Via Suez)

0.50

0.21

0.24

0.12

1.06

Qatar - China

0.47

0.22

0.00

0.12

0.81

Australia - China

0.28

0.12

0.00

0.11

0.51

Source : Howard Rogers – The Oxford Institute for energy studies (march 2018).

The underlying assumptions for the transportation costs are :

A charter rate of $ 55,000/day. HFO cost of $ 380/ton (corresponding with $7/mmBtu for Europe and $ 8/mmBtu for Asia, to calculate the cost of the boil off rate)

With charter rates at $ 100,000/day and LNG prices at present levels, the transportation cost is between $0.75 and $ 1.5/mmBtu  higher !!

Another important risk factor for LNG projects is the fact that it  is hard to find costumers for the longer term for the different LNG projects. Most customers only want to engage for 3 or 4 years : producers only have guaranteed demand for a shorter period and this could disrupt the market in a negative way, because investments need return!

What does all this mean for GOLAR (and others) :

1° If LNG prices go down, so will charter rates : demand is the driving factor for charter rates and not supply

More vessels will become available and charter rates will crash.

With a fleet concentrated in the spot market, this is a huge problem for GLNG.

2° With lower LNG prices it is almost impossible for GLNG to find customers for projects similar to the Hilli.

These projects are simply not profitable for the buyer ! :

According to Golar the gross revenues for the project was estimated at $ 164 million annualy. (before the 50% sale to Golar Partners) and without the oil bonus.

At full production this corresponds with a cost of $ 2.78/mmBtu for Perenco.

Feedgas cost for Perenco can be estimated at $ 3.75/mmBtu (see corresponding prices at similar units)

Transport cost to Europe (11 days) is $ 0.83/mmBtu.(Cameroon gas is likely to go to Europe)

Global cost for Perenco is $ 7.36/mmBtu. (not taking into account the extra cost if Brent prices are over $60 !).

As the graph above shows, LNG prices BELOW THIS LEVEL, are NOT exceptional !!

The above scenario is the bear case for GLNG ! Will LNG prices come down ?? I think they can and there is a big chance they will !

The impact on GLNG can be catastrophic.