Analysis: How much US LNG will go to the UK?

OREANDA-NEWS. June 22, 2015. The UK is likely to be an importer of US LNG, but the amount will depend on how US offtakers handle fixed liquefaction fees and the attractiveness of alternative higher-priced markets.

US LNG to the UK would be profitable in the first quarter of 2017, first quarter and fourth quarter of 2018, fourth and first quarter of 2019, and first quarter of 2020, according to Argus calculations of the UK NBP and US Henry Hub gas forward curves.

The reason it works for those quarters is because the spread between NBP winter quarter prices and summer quarter prices are wider, compared with the equivalent Henry Hub winter and summer quarters. For example, the spread between third-quarter 2017 and fourth-quarter 2017 on NBP is 90?/mn Btu but for Henry Hub only 15?/mn Btu.

But how offtakers handle liquefaction costs will be key to how much US LNG comes to the UK. Also, because US LNG is sold on a fob basis, the LNG can be shipped anywhere so will go to the market with the highest netback, so not necessarily to the UK even if NBP prices are at a profitable premium.

In contracts signed by US LNG developer Cheniere Energy for cargoes from the 18mn t/yr Sabine Pass LNG project and a number of European offtakers, the offtakers have to pay a fixed liquefaction fee, regardless of whether LNG is loaded or not. Offtakers include Shell the UK's BG, Spain's Gas Natural Fenosa, France's Total, and the UK's Centrica.

The fixed liquefaction fee is between \\$2.25/mn Btu and \\$3/mn Btu, on a take-or-pay basis.

Since offtakers will have to pay the fixed \\$3/mn Btu fee whether they take any LNG or not, if NBP prices exceed Henry Hub prices by more than the shipping cost, it would be better to send LNG from Sabine Pass to the UK to recover some of the \\$3/mn Btu liquefaction cost, even if they do not recover all of it.

If the \\$3/mn Btu fixed liquefaction fee is removed from the calculation and treated as a sunk — a cost incurred in the past that cannot be recouped — then US LNG to the UK would be profitable to the UK all the time between 2016 to 2020.

But it is unlikely that offtakers would send large volumes of loss-making LNG to the UK. Concerns may include further depressing the NBP price if a large quantity of LNG is shipped, which would result in higher losses from further LNG deliveries from the US to the UK. And European offtakers have gas fields and positions in the European gas pipeline market and would be unlikely to flood the market with US LNG if it were losing money.

US LNG offtakers may take LNG cargoes to other markets at a loss to preserve the UK NBP price. Countries with potential increased LNG demand when prices are low include India and China, which underutilises its LNG import infrastructure. Another option could be to sell the cargoes fob at a better price, but the offtaker would not be able to determine the final destination of the cargo.

For Sabine Pass offtake, BG signed up for 3.5mn t/yr at a \\$2.25/mn Btu fixed liquefaction cost and 2mn t/yr at \\$3/mn Btu. Gas Natural Fenosa has 3.5mn t/yr at \\$2.49/mn Btu. Total has 2mn t/yr at \\$3/mn Btu and Centrica has 1.75mn t/yr at \\$3/mn Btu.

The calculations use the Argus US Gulf coast (USGC) fob LNG forward curve compared with the UK NBP gas forward curve and assuming around \\$1/mn Btu for shipping.

The forward curves run up to the third quarter of 2020 only. The Argus USGC fob prices are calculated at 115pc of the US Henry Hub gas price plus the volume-weighted average of the liquefaction fee.

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