PIRA: U.S. LNG projects could struggle to recover costs

NYC-based PIRA Energy Group believes that the return of Japanese nuclear capacity, surging Asian LNG supply, and the weakness of crude prices does not bode well for Atlantic Basin flows to Asia.

The broader compression of Asian spot prices at the high end against Henry Hub at the low end strongly implies shorter haul LNG trade and lower prices, PIRA said in its report.

In the United States, despite sequentially faltering domestic production and robust electric generation gas burns, high absolute storage levels facing near-term gas balances continue to pose bearish price risks. As in 2012, the upcoming Bidweek cycle encompassing settlement of the September NYMEX contract looks especially prone to take the brunt of potentially bearish Henry Hub price fireworks.

The next two weeks mark the lowest demand point of the year for European gas. Friday’s close below 40p/th for Sept. 2015 was the first in over a year and the bias remains to the downside in the weeks to come. PIRA does not believe in large amounts of downside risk on the prompt spot contracts, but it does see larger risks for the winter and summer strips ahead, which are more loosely tied to a falling ceiling on contract gas tied to lower oil prices.

The North American natural gas supply curve continues to look flatter. PIRA still believes that there will be an uptick in price as the US passes through its demand surge and LNG and industrial projects start up, but the extent of the inflation adjusted run-up post-2020 has been reduced as the resource base expands and productivity improves.

PIRA also sees an increasing concern that U.S. LNG projects will find it difficult to recover full costs plus a return in an increasingly competitive market.

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Image: BG Group