The five stages of LNG grief

This is a story about how LNG producers went through the five stages of grief, before accepting the market will be oversupplied and adjusting their trading strategies accordingly.

The five stages of grief are: denial, anger, bargaining, depression and acceptance.

Denial

It’s easy to look back at past comments and be wise after the event. But some of the predictions from producers now look like denial of what was actually happening.

Take comments from David Knox, former chief executive of Australia’s Santos, in 2014.  He said the Henry Hub gas price is likely to be $6-7/mn Btu by the time many US LNG projects reach full capacity in 2020.

Adding liquefaction and shipping costs will take the landed price of US LNG to Japan or Korea to around $14.75-15.25/mn Btu.

“So I think that despite the US being a new source of LNG, the perception that Henry Hub or the US Gulf Coast LNG is going to provide a cheaper source of LNG and therefore undercut Australian supplies or other new supplies from the region is not as strong or as believable as most people would wish,” he said at the time.

Current forward Henry Hub and Brent oil-linked LNG forward curves suggest LNG will be around 30-50pc cheaper than what he thought at the time.

Earlier this year, even Shell can’t quite accept the market is oversupplied either, with some linguistic leaps to avoid the question.

Anger

Not really anger on the surface, but perhaps frustration about how buyers have been able to squeeze prices and producers have been unable to sign long-term contracts, which has resulted in new liquefaction projects being shelved.

In Australia, Chevron bemoans the lack of investment.  In Canada, delays and cancellations from Malaysia’s Petronas and Shell.

Long-term contracts will remain necessary to anchor investments in new liquefaction capacity despite rising spot trade, France’s Engie warned in 2015.

“Major producers including Chevron, ExxonMobil and Total share the view that traditional long-term purchase commitments by LNG buyers are essential for producers to take a financial risk in investing in development of such capital-intensive projects,”— was the feeling in 2013 at an LNG conference in Japan.

 Bargaining

However, LNG buyers saw the oversupply as an opportunity to renegotiate prices and squeeze producers.

India’s Petronet have renegotiated two deals. It started renegotiations with ExxonMobil in 2015 and succeeded in 2017 (while also increasing volumes).

The other renegotiation was with Qatar’s Rasgas, overcoming some initial resistance, Poland’s PGNiG also eventually negotiated price cuts with Qatargas.

Trading houses such as Gunvor, Vitol, and Glencore have also stepped in, where others have shied away.

Depression

Do major oil and gas companies get depressed?  I’m not sure I can find much evidence of it.

But they have fired warnings at LNG buyers about how switching to shorter-term contracts and gas hub pricing will result in reduced investment in new projects and therefore fuelling fears of shortages in the future.

The cost blowout for Australia’s LNG projects must have been pretty painful too, adding several billion dollars to project costs.

Acceptance

However, it very much feels that producers are out the other end of the grief cycle.  For better or worse, producers are willing to negotiate shorter-term contracts and on different indexations.

The Henry Hub linked US deal between Cheniere and BG kicked it all off, and what once was rare became very much mainstream.  And European gas hubs would be considered by US developers and spot deals have increased and become the norm.

BP was early to the party and signed a long-term Henry Hub deal with Japanese utility Kansai Electric

Even refusenik Qatar relented, selling spot cargoes and even signing a three-year contract with Turkey’s Botas this week. (They used to say they would only sign 20 year, oil-linked deals… How times have changed…)

Full recovery?

Since the industry is cyclical, I’m sure that producers are biding their time and waiting for the oversupply to finish (between 2021 to 2023, depending on who you ask).

Already, some are talking about an LNG crunch in 2030. Perhaps it will be the buyers’ turn to go through the grief cycle and producers will have the upper hand…

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