Fitch: uncertain outlook for US LNG projects

The possibility of an oversupplied global liquid natural gas market and more competitive Asian LNG prices has introduced an uncertain outlook for US LNG projects, according to Fitch Ratings.

Fitch believes that the global LNG market may become oversupplied over the next five years as new capacity comes to market. Global LNG capacity, considering existing and under-construction projects, is anticipated to reach approximately 420 million metric tons per annum by 2020, equivalent to over 1.8x 2013 LNG demand.

In an LNG oversupply scenario, Fitch anticipates that the prospects for new US LNG capacity would weaken as other established LNG centers (e.g. Qatar, Australia) could price at operating costs. The US LNG fixed take-or-pay payments, opportunity cost of Henry Hub natural gas domestically, and distance from LNG demand centers could become economic handicaps for US LNG projects. Reduced US contracting and final investment decision momentum, including BG Energy Holdings decision to delay FID on Lake Charles LNG until 2016, suggests that offtakers are re-evaluating and searching for improved visibility on the longer term economics.

While Fitch expects oil-linked LNG prices to provide US projects with favorable Asian export prospects, the possible delinking of Asian LNG and oil prices could increase the economic dependence of US LNG on low HH prices to stay competitive. Fitch expects, given its strong economic incentive, Asian counterparties will seek more competitive LNG prices. The possible LNG supply/demand imbalance, in conjunction with Asia’s large import market position, rising mix of “non-long-term” LNG trade, and estimated LNG contract expiration profile may provide Asian LNG importers with more pricing leverage.

Recent Brent oil and HH pricing of about $65-$70/barrel and $2.50-$2.75/mmbtu, respectively, creates a very attractive oil-linked Asian export opportunity for US LNG based on the results in Fitch’s indicative margin sensitivity analysis. However, recent lower spot prices for Asian and European LNG deliveries provide near break-even margins. This difference in LNG economics occurs despite HH prices being at historic lows and illustrates the pricing support provided by oil-linkage.

Fitch believes that additions to new US LNG capacity will slow considerably over the medium term. New US LNG capacity is expected to be mainly comprised of the under-construction and, possibly, later-stage development projects and train expansions. Fitch expects brownfield projects to remain favored due to their capital cost and, to the extent regasification terminals are made available, operational flexibility advantages. This should lead to a crowding out of greenfield projects. However, Greenfield projects may improve their prospects by reducing capital costs and/or, more likely, accepting lower returns.

Image: BG Group