U.S. LNG producers are scaling back ambitions and are looking to survive in what could be the worst economic environment since the Great Depression. U.S. LNG will get through this, but not without serious pain.

COVID is shaking assumptions about demand growth. Most industry analysts believed 2020 incremental world LNG demand growth would total about 15 – 25 MTPA. For context, the International Gas Union placed total LNG 2019 demand at about 355 MTPA in 2019, or at about 47 Bcf/d. LNG demand is not growing at a respectable rate of 4 – 6%, however. Indeed, world LNG demand may be declining. Natural gas is better insulated from market volatility than transport fuels in the pandemic: while many people can’t (or won’t) travel due to lockdown restrictions, electricity is a necessity for most world consumers. Still, industrial and residential LNG consumers are cutting back where they can. LNG demand could fall this year.

Any decrease in demand will aggravate the supply glut which existed even before the pandemic. Most analysts in the pre-COVID world believed LNG markets would remain long until 2024+. If the pre-COVID incremental supply projections of ~120 MTPA comes online by 2027, the supply glut could worsen, hammering LNG prices.

It’s not clear how much further LNG prices can even fall. While Henry Hub prices have traded at all-time lows (which is good for LNG exporters), the U.S. benchmark has recently traded at a premium to markers in Asia and Europe. U.S. LNG producers aren’t competitive in that dynamic, which is why we’re seeing as many as 25 cargo cancellations, so far. With overseas prices so low, producers can’t sell these returned volumes on the LNG spot market. FOB producers such as Sabine Pass and Corpus Christi have some additional risk, as they source their own gas exposing them to at gas basis risk.

What can stabilize LNG prices? Just as oil markets may be able to balance amid stabilizing demand and supply shut-ins, U.S. LNG needs key export markets to pick up. But additional domestic and international supply shut-ins are still necessary. 

In this environment, we continue to believe that no U.S. projects will take FID through 2020 and probably the first half of 2021, although Costa Azul on the West Coast of Mexico could take FID as early as next month. Production pauses at existing terminals are extremely likely, with reports that LNG buyers have cancelled over 20 cargoes from U.S. producers.

We continue to project that several brownfield projects (Costa Azul in Mexico, Freeport T4, Cameron T4&T5, and Corpus Christi Stage III) will take positive Final Investment Decisions. However, the probability of these projects taking FID is much lower than three months ago. COVID-19 physical distancing needs and financing difficulties will also delay project completions. It’s a painful period for U.S. LNG.  Many may have missed the bus…