After battening down the hatches in August, US LNG exporters have weathered the storm of Hurricane Laura, with the key Sabine Pass and Cameron LNG terminals now back in action. But, the other storm faced by the LNG industry, that caused by COVID-19, is set to rage on. Back in February, with US LNG cargoes cancelled or force majeure invoked by European and Asian importers, risk analysts may have feared that LNG exporters were genuinely facing an existential crisis.
How is the pandemic affecting LNG exporters? And, what signals are emerging to determine the long line of new export projects coming over the horizon?
To take a stand-out and high-profile example, Cheniere Energy Inc., (Cheniere) operator of Sabine Pass, is faring better than many analysts had expected. It reported second quarter (2Q) earnings to 30 June 2020 showing revenues of USD 2.4bn and net income of USD 197m. Returns and sales data were supported by upbeat margins, as well as by USD 458m of revenues linked to LNG cargoes cancelled by buyers, and the US operator committed itself to expansion at Sabine Pass and at its other terminal at Corpus Christi. Cheniere’s boss, Jack Fusco, indicated that the company is now sticking to its full-year adjusted earnings projection of USD 4bn. And, based on the swift recovery from Hurricane Laura and a rise in September LNG prices (as seasonality and outages at Australian LNG projects combine with slowly-recovering Chinese LNG demand) the US company will probably meet its target. At this rate, Cheniere will probably see an improvement in its risk rating, based on its responsiveness to the pandemic and its resilience in facing unexpected challenges.
Is Cheniere a good barometer for the rest of the LNG industry?
Only up to a point. The Cheniere model is based more obviously than other projects on flexibility, in relation to terms and price clauses, and on a liking for diversification, evident from its very wide customer base. In other words not having “all the eggs in one basket”. However, it is arguably setting a trend in LNG risk management, harking back to “old-style” strategies of spreading risk, offering flexible terms, and reaping the credit benefits in the process.
Moving forward, how will planned LNG projects be affected by the fallout from COVID-19?
The near-term response appears to be favourable. French energy group, Total, has committed to the 13.1 mtpa capacity Mozambique LNG project and secured a large tranche of funding, while fellow oil major, ExxonMobil, is likely to commit to Mozambique’s other major project, Rovuma LNG. US and Canadian projects such as Tellurian’s Driftwood LNG, with a likely 2024 start, and Pieridae Energy’s 2023-startup, Goldboro LNG, are probably safe, but the market as a whole faces a different risk, namely that there will simply be too many LNG export projects for a potentially “slowed-down” post-COVID-19 world. And, there are many of them, either new projects or expansions, in Russia, Qatar, Indonesia, Oman and other locations.
A mild winter in 2020/21 could drain confidence away from some LNG projects, if it causes weaker gas prices and thereby forces impairment charges to feedstock gas reserves held by project developers. But longer-term fundamentals must still be assessed. If we compare with conditions in the oil market, the outlook for global oil demand is mixed, due to muted prospects for the aviation industry, likely continued uptake of electric vehicles and similar forces. The recent firmness of crude oil prices has been due to direct market intervention by the OPEC+ group of producers, while gas and LNG operators have been fully exposed to market forces.
However, by contrast, and despite COVID-19, the underlying outlook for gas and LNG appears more favourable, based on increased demand in industrial and power generation sectors. And, any adjustments in the structure of gas and LNG production will not be achieved by intervention in the style of OPEC+, but by natural market correction. KYC analysts assessing the risk profiles of future LNG exporters, will have to monitor a wide range of indicators, both market-based and specific to individual projects.