LNG: Another Casualty Of Low Oil Prices?

LNG: Yet Another Casualty of Low Oil Prices?

The aftershocks from the oil price crash continue to be felt in energy markets around the globe.

The latest victim is the Asian liquefied natural gas (LNG) market.

Heavy Asian demand for LNG sent the price soaring to near $20 per million British thermal units (Btu) last March. But, just one year later, spot LNG prices in Asia have plummeted to about $7 per million Btu.

The catalyst for the LNG crash is oil, but the reasons are twofold…

The first reason was explained in an article by my colleague, Karim Rahemtulla. You see, in many parts of the globe, oil can be directly substituted for LNG as an energy source. Accordingly, as oil gets cheaper, the more viable a substitute it becomes.

The second reason has to do with the structure of the market.

Going Down With the Ship

In Asia, most LNG is traded through long-term contracts. These LNG contracts are based on the price of oil, not natural gas. And the contracts operate on a time lag of three to six months. That means, not all of oil’s 50% price plunge has been factored into some Asian LNG contracts yet.

Consultancy Energy Aspects Ltd. told Bloomberg that average LNG contract prices in Asia will drop another 30% to 35% in 2015, staying below $10 per million Btu.

That sentiment is echoed by Fitch Ratings, which also expects the average Asian LNG contract price to be below $10 per million Btu later in 2015. The average is currently about $14.

The expected drop in price is bad news for all of those planned LNG projects around the globe that were counting on rising Asian demand.

Fitch specifically pointed that the $10 price is below the break-even prices for Australian LNG projects. Those are forecast to be in the $11 to $13 per million Btu range.

Canada’s plans to turn its West Coast into an LNG export hub to Asia is also under pressure from the drop in prices.

Domestically, the oil price slump has already claimed its first victim…

The planned 8-million-ton-per-year Excelerate Energy LNG terminal in Texas has been put on hold until later this year, when the project will be reassessed. The terminal was scheduled to begin LNG exports in 2018.

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