Global War for Gas Market Share Claims $40 Billion LNG Casualty

An undated handout photo of Chevron’s Gorgon LNG project located in Western Australia. Photo credit: REUTERS/Chevron

By Naureen S. Malik and Stephen Stapczynski

(Bloomberg) — The global LNG boom is turning into a war of attrition amid a glut in the seaborne natural gas market.

The conflict spanning from Australia to Qatar to the U.S. claimed a major casualty this week when Woodside Petroleum Ltd., with partners Royal Dutch Shell Plc and BP Plc, scrapped plans for the $40 billion Browse liquefied natural gas project in Australia amid the market slump. More cancellations or delays are expected as current supply kills any incentive to invest, according to BMI Research. Regulators this month rejected Veresen Inc.’s request to build a terminal in Oregon, partly because it couldn’t prove there was enough demand.

The world’s supply of liquefied natural gas is set to surge over the next five years as projects already under construction in countries including Australia and the U.S. add to an emerging glut, according to analysts including Energy Aspects Ltd. and Poten & Partners. That’s pressuring liquefied natural gas prices already plunging because of the collapse in crude, which serves as a benchmark for some LNG contracts. Browse is only one of the many LNG projects doomed to fall by the wayside because the market’s slump, according to energy consultancy PIRA.

‘A Bloodbath’

“The current pricing environment is simply killing off the weaker ones and Browse was definitely one of those,” said Madeline Jowdy, senior director of global gas and LNG at PIRA in New York. “It’s going to look like a bloodbath in the 2017 and 2018 timeframe with cutthroat LNG prices.”

The U.S., awash in so much gas that prices there touched the lowest levels since the 1990s, sent its first shale exports from Cheniere Energy Inc.’s Sabine Pass terminal in Louisiana in February. This week, the first tanker set sail from Chevron Corp.’s massive Gorgon LNG terminal project off northwest Australia.

Just two years ago, exporting LNG from the U.S. sounded like a lucrative opportunity for shale drillers. Buyers in Northeast Asia were paying $20 per million British thermal units more than spot Henry Hub gas prices. That premium has collapsed, this week trading around $2.70.

Managing Losses

“It’s going to be a really difficult period and some companies are not fully prepared for the changes that are coming to the market,” Jason Feer, head of business intelligence at Poten & Partners in Houston, said Wednesday. “There has never been a period where the oversupply is going to be as big as it is going to be over the next few years. The question for some people won’t be, ‘How do I make money?’ It will be, ‘How do I manage my losses.’”

Investors are yet to sanction a single LNG export project in Canada. Companies including Shell and Petroliam Nasional Bhd. are among proponents of about two dozen facilities on the country’s Pacific and Atlantic coasts. AltaGas Ltd., which was leading one of the smaller proposals off British Columbia, last month shelved plans after failing to line up customers.

Given the long lead times for LNG projects, a supply squeeze may develop in the first half of next decade if investment decisions aren’t made in the next several years, said Saul Kavonic, an analyst at energy consulting firm Wood Mackenzie Ltd.

Jera Contract

While the U.S. Federal Energy Regulatory Commission has rejected Veresen’s initial proposal for an Oregon terminal, the company said on Monday that Japan’s Jera Co., one of the world’s largest LNG buyers, had signed a non-binding deal for LNG from the project. The contract would help Jera develop its trading business in Asia because it doesn’t restrict the final destinations of the shipments.

The less restrictive terms mirror those being negotiated by buyers worldwide who are reluctant to sign long-term contracts with prices so low. The slump has increased their bargaining power, and they’re seeking to purchase more spot cargoes.

Perth-based Woodside said the “extremely challenging” market was forcing the company to form a new plan and budget for developing the gas resources off Western Australia.

The play is “relatively low cost (especially compared to Australian projects) and offers flexibility, important for Japanese buyers facing uncertainty over their future LNG needs,” said IHS Inc. analyst James Taverner.

–With assistance from Rebecca Penty.

© 2016 Bloomberg L.P

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