COVID-19 Downturn Arrives for LNG Terminals

The winds have changed for the booming U.S. LNG export industry. With falling demand for energy and little to no price differential between American and overseas natural gas markets, liquefying and shipping natural gas across the Atlantic or the Pacific is no longer the high-margin enterprise it once was. 

Heavily-oversupplied European gas markets and high storage utilization mean that EU hub indices are now trading in the range of $1 per MMBtu, and the key index for Japan and Korea has fallen below $2.00 - leaving little room when the U.S. Henry Hub price is at $1.80. This means that LNG export terminals are now dialing back production, data from Natural Gas Intelligence shows. IHS Markit predicts that utilization at U.S. export terminals could fall from highs near 100 percent to as little as 50 percent by the summer. According to a new forecast from market research firm Poten and Partners, as many as 130 cargoes from U.S. terminals could be canceled between May and October.

This drop in demand means less work for LNG carriers. Spot rates for the largest LNG carriers are down to roughly $40,000 per day from a peak of more than $160,000 per day in October, raising concerns among shipowners about the earnings potential for this high-capital-cost vessel class. Each LNG carrier costs about $180 million to construct at a South Korean yard, and several shipowners told the Wall Street Journal that with demand for their services falling, the prospects for high earnings no longer look as bright. 

The world's most valuable company, Saudi Aramco, recently postponed its plans to charter-in 12 LNG carriers to support Sempra's Port Arthur U.S. Gulf Coast liquefaction terminal. A final investment decision on the terminal project has been postponed until 2021, leaving little need for an owned LNG carrier fleet in a down market. 

However, Qatar Petroleum's state-owned LNG shipbuilding program is still moving forward: in April it placed a 16-vessel, $3 billion order at CSSC-owned Hudong Zonghua Shipbuilding. The order - China's largest export shipbuilding contract ever - was underpinned by heavy financing support from the Chinese state.