U.S. LNG: Looking Ahead to Next Summer… and Beyond

It’s been a difficult year for U.S. LNG exporters: we’ve repeatedly said this past summer was the Summer from Hell. Will conditions improve next year, or will we see a repeat of this summer, with dozens upon dozens of cargo cancellations?

To look to next summer, let’s consider the 2020/2021 winter. Europe and Northeast Asia are the two most important destinations for U.S. LNG. Two factors this winter will likely determine U.S. LNG’s conditions next summer: European storage levels, and Northeast Asia’s ability to contain COVID-19 cases from surging. The initial signs out of Europe are not encouraging for U.S. LNG: COVID cases are soaring, while the continent could receive a glut of gas from new pipelines from Russia and Azerbaijan. It remains to be seen if Europe will experience another record-hot winter, which would constrain natural gas demand. Northeast Asia is fighting back another wave of infections, for now. Development, production, and distribution of a COVID vaccine will be a major unknown. While LNG winter netbacks will likely remain “in the money,” supporting U.S. exporters, next summer could be another difficult one. We think next summer will see improving conditions, but significant cancellations are still possible.

U.S. LNG exports today – and next summer

According to the most recent EIA data, about 80% of all U.S. LNG exports go to Europe or NE Asia. Europe’s share of exports has surged over time, as European offtakers started to receive shipments from new trains coming online in Sabine Pass, Corpus Christi, Cameron, and Freeport. Just as importantly, the U.S. – China trade war capped LNG exports and resulted in flows shifting from Asia to Europe. While the Indo-Pacific will likely contribute the lion’s share of future, incremental LNG exports, Europe is the most important market for U.S. LNG today.

Given that Europe and NE Asia are the most important export markets for U.S. LNG, how does demand look? As we’ve said for months, COVID-19 is the single most important variable for all market outcomes. The outlook is grim in Europe, and uncertain in NE Asia.

Europe is now reporting record numbers of COVID cases – higher than even the United States, and hospitals are rapidly filling up with COVID patients. NE Asia is a big question mark. Although cases in NE Asia have been very low, there appear to be some risks going into winter. Mainland China reportedly tested all 9 million residents of Qingdao for coronavirus after a local outbreak; more troublingly, there may be an unreported cluster of cases in Jiangsu province.

To Next Summer… and Beyond

While COVID dynamics will get most of the attention this winter, weather conditions could prove more important for LNG’s long-term prospects. Europe experienced its hottest temperature on record last year, limiting demand for LNG and other sources of energy. If winter temperatures continue to rise across the continent, reducing “cooling days demand” and constraining LNG demand, prospects for future U.S. LNG exports will become increasingly grim.

Europe is the single largest destination region for U.S. LNG. If its ability to absorb natural gas is permanently degraded, new LNG projects will be forced to increase their reliance on Asian gas markets and face even greater hurdles to taking FID.

Greater international competition ahead?

On the supply side, U.S. LNG could face even greater competition, particularly from the Qataris. We’ve heard that Qatari associated gas is costless when oil prices exceed $30/bbl – and Qatar can sell into European spot markets below $2.00-2.50/MMBtu landed (i.e. after including upstream, liquefaction, and shipping costs). U.S. LNG cannot compete at those prices. European could also receive major volumes from two pipelines this year or next year: the Trans Adriatic Pipeline, or TAP; and the highly controversial Nord Stream 2. While EU natural gas production is expected to decline, U.S. LNG exports will face serious competition.

No U.S. LNG projects expected to take FID this year… or next year

Even before the pandemic, we were skeptical of projects moving forward due to considerable supply/demand imbalances in world LNG markets. With demand taking a hit from COVID (as well as gas-to-coal switching in China), and Qatar waiting in the wings with even more capacity, we see few reasons for optimism about North American LNG. Qatar will most likely play its trump card – mega expansion backed by ridiculously cheap natural gas, thus increasing the bar for greenfield projects globally.The boat for 3rd wave of U.S. LNG may have sailed already.

It’s also worth noting that problems in the U.S. oil complex will likely spill over into LNG. Capex budgets are facing major reductions, with producers like Energy Transfer cutting their capex by 10% or more. With capex funds from their sponsors increasingly scarce, marginal LNG projects (such as Energy Transfer’s Lake Charles LNG) will face even greater challenges. Some projects will suffer indirectly, such as Corpus Christi Stage III. With many upstream producers struggling to maintain oil and gas production in the Permian and Eagle Ford basins, gas supply agreements could become less viable. Corpus Christi Stage III has inked two GSAs (with EOG and Apache, respectively), but could face greater difficulty signing similar deals with upstream producers in the future.

We continue to believe that no North American projects will take FID in 2020, 2021, or 2022, with the possible exception of Sempra’s Costa Azul. Pre-COVID headwinds made FID very risky, and the worst economic conditions since the Great Depression have only worsened the outlook.

Better, but bad – or worse?

COVID continues to inject uncertainty into the macroeconomy and world energy demand. Nevertheless, we see some discouraging signs for U.S. LNG. COVID cases are rising across the world, constraining economic activity and energy consumption, while the LNG industry still suffers from excess capacity. Summer 2021 probably won’t be as bad as this year, particularly if a vaccine is developed and distributed quickly. Still, many of the risks are to the downside. It’s too soon to rule out a second Summer from Hell for U.S. LNG.