LNG Flood

Jim Brown
 
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With $200 billion of LNG projects underway in Australia alone it looks like there will be a flood of LNG to market in the next 3-5 years.

Chevron has two major projects in Australia worth nearly $100 billion. The Gorgon and Wheatstone projects are early in the pipeline and in the right part of the world for delivery to Asia but Chevron is still struggling to pre-sell their expected production.

The way the energy companies fund their developments is by pre-selling production with most contracts for 20 year commitments. The energy company then takes these contracts to the market and they raise whatever cash they need to fund the projects. Typically the energy company does not commit to actually building the project until they get 70-80% of their expected production under hard contracts.

Chevron has only been able to contract 65% of the $54 billion Gorgon project. Australia has a whopping 7 LNG projects worth more than $200 billion that are going to begin production between 2014-2017. LNG buyers realize they are going to be able to pick their suppliers from a wealth of potential candidates and they are holding off on signing 20 year commitments. They want the projects to reach the production stage where they will be competing with each other for the available buyers.

There are also dozens of projects underway in the Middle East, Africa and of course the USA. As these projects get closer to starting production the cost of LNG on the global market is going to plummet. LNG today is roughly $18-$20 per Mcf, which costs just $4 in the USA. Costs in Australia are a lot higher and there is no local market to suck up excess gas supplies.

The U.S. LNG market is facing rising costs 3-5 years from now. With only about 1 Bcf per day of excess gas in the U.S. the prices are weighted to local consumption. Once the first three major LNG facilities are up and running they could pull about 20 Bcf per day out of U.S. supplies. With production only expected to rise about 1 Bcf per day per year for the next five years there is going to be a battle over the available gas.

Today they are looking at $4 gas and the windfall profits they will make selling it at $18 overseas. Five years from now our gas prices could be $10 or more once U.S. consumers have to compete with LNG exports.

With multiple LNG facilities around the world recently beginning production the price of LNG has fallen significantly. Prices for Asian spot cargoes over the last few months have fallen to 3.5 year lows. LNG today is actually less than the firm prices already committed to for the next 20 years.

Almost every month there is a new LNG project making headlines in the USA. Australia has another $180 billion in projects under consideration with first production well out in 2018.

It appears there is a tsunami of LNG headed our way and prices are going to be a lot cheaper than many expected just a couple years ago. Only the early adopters like Cheniere Energy (LNG) in the U.S. and Chevron in Australia are going to be profitable up front. There will be a lot of projects that are never completed or only partially completed for possibly one train instead of 3 or 4.

Oil Inventories

Crude inventories declined for the seventh of the last eight weeks. Inventories dropped -2.1 million barrels to 360.5 million. Despite the decline the inventory levels are still right at the top of the five year average as seen in the chart below. Crude imports rose slightly from 7.46 mbpd to 7.63 mbpd. Inputs to refiners rose a small +80,000 bpd. Refinery utilization rose slightly to 93.5%.

It was a confusing inventory report because it was for the week ahead of the Labor Day driving holiday and there were no signs of activity in the report other than the slight rise in utilization.

Gasoline inventories fell -1.0 million barrels and gasoline demand rose +320,000 bpd. That was the only indication that retailers were drawing down supplies ahead of the holiday.

Distillate inventories rose for the first time in four weeks with a 1.3 million barrel gain. There was a corresponding decline in demand of -350,000 bpd. That is a pretty steep drop and might have related to a lot of vacations taking deliveries off the road but that would be just grasping at straws.

Cushing inventories rose for the third week and now back over 20 million barrels. U.S. production spiked to 8.63 mbpd and a new 18 year high and 14.7% over the same period in 2013. Oil imports are down -17.6% over the same period.

In the graphic below green represents a recent high and yellow a recent low.





Propane inventories continue to soar with the addition of +1.9 million barrels to bring inventory levels to 74.7 million. That is 12.6 million barrels more than the same period in 2013.

Demand rebounded from 788,000 bpd to 985,000 bpd. If you need propane for the winter now is the time to buy it. Prices are going up after Labor Day. The weather forecasters are predicting a colder than normal winter.


Natural gas inventories rose +75 Bcf to 2,630 bcf. This continues to be the fastest build in 11 years. They are still -16.5% below the five year average at 3,148 Bcf.


Market

The markets are closed on Monday for Labor Day but I expect the rest of the week to be positive as end of month retirement contributions hit the market. Fund managers only have 60 days to improve their results before the October 31st fiscal year end for funds. If they are going to earn a big bonus they only have 60 days to make it happen. A recent survey found that 81% of actively managed funds are trailing their benchmarks. That suggests fund managers will come back from the holiday with an aggressive mindset.

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Jim Brown

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