At present, US LNG is less competitive worldwide given the narrow differential between Henry Hub prices and Northwest Europe TTF price as well as LNG spot prices in Asia. Once a 15% premium on Henry Hub is added as per contractual terms, plus transportation and regasification costs, the landed price for US LNG cargoes is currently uneconomical in Europe and Asia.
In consequence, US LNG exports are expected to decline for the remaining months of the year in particular during Q3 2020. A recovery in exports towards the end of the year is still dependent on sustained gas demand worldwide. Although LNG demand for natural gas is normally less than 10% of total US natural gas supply, LNG plants are already an outlet for relieving the excess of natural gas supply that exists in some producing areas of the US.
Before the Covid-19 pandemic, there were at least ten billion cubic feet per day (bcfd) of new capacity not yet under construction expected to come online by 2025. Most of this capacity required final investment decisions in 2020 and 2021 and several developers have already announced delaying their decisions. Given the uncertainty on the growth of LNG demand it is possible that these projects, if sanctioned, add new capacity well after 2025 and perhaps even closer to 2030.
One distinct aspect in the US LNG sale and purchase agreements is that fixed costs associated to liquefaction are payable regardless of whether the cargo is lifted. In other words, liquefaction costs are considered a sunk cost. As a result, what matters for LNG buyers is whether the landed price for LNG in export destinations is high enough to cover variable costs. The differential of Henry Hub to Northwest Europe TTF and Japan’s LNG spot price illustrates the unfavorable economics for US LNG exports during 2020. Even with an improvement for Q3 and Q4 the differential is expected to remain below $1.5 per mmbtu.
The flexibility embedded in the selling contracts from US LNG producers is proving to be an advantage for LNG buyers. US tolling scheme establishes a penalty generally equal to agreed liquefaction fixed costs of $2 to $3 per mmbtu, which is normally a lower penalty when compare to the penalty in traditional LNG take-or-pay contracts.
The US LNG sector will likely continue to be competitive given the non-integrated nature of its value chain and innovative contractual and pricing schemes. A cornerstone of this success will remain the low feedstock gas price reached by upstream producers, which are being forced to become even more cost-efficient to be competitive at current price.