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Offshore Energy Hoegh LNG’s FSRU Independence in Klaipeda, Lithuania

Gulf of Mexico: A New Spot LNG Market Hub

LNG supply boom will also drive demand for Floating Storage Regasification Units By Ted Michael, Analyst, LNG & Natural Gas, Genscape

T

he U.S. Gulf of Mexico has the potential to emerge as a global Liquefied Natural Gas (LNG) shipping hub, with the potential to become a spot tanker destination, not unlike Fujairah, Gibraltar, and Singapore. The increase of spot sales and the use of spot chartering will create a “waiting for orders” market sitting offshore. The U.S. has a large mix of capacity holders spread over 15 trains, including European and Asian utilities and portfolio holders such as Shell and Gas Natural. The U.S. has already shown a pattern of sending LNG tankers to all corners of the globe, and the lack of specific destination clauses and the variability of plant operations enable fast response to market signals. This flexibility will encourage a mix of term shipping and spot charters for capacity holders.

U.S. Gulf of Mexico LNG Hub: Merchant to the World LNG plants in the U.S. have a large number of capacity holders and unique contractual features that will assure a large spot market in the Gulf of Mexico. In addition to no destination clauses, the U.S. LNG supply is capacity only. Buyers pay for Liquefaction separately from feed gas, and capacity holders may elect to turn back feed gas supplies into the U.S. grid, paying only capacity charges. This ability allows plants to shut down if global prices fall below marginal costs plus Henry Hub. In turn, capacity holders may seek a shipping portfolio that is part term charter and part spot. U.S. production can both increase volume seasonally, rerouting supply from Latin America and the Middle East in summer to Northern Asia or Southern Europe during winter. U.S. LNG traffic will double in volume by the end of the year, and 30 Marine Log // April 2017

then triple between 2018-2020, with the potential to load up to 1,000 cargos a year. This could ultimately make the Gulf of Mexico, with its destination-free traffic, the most important LNG hub in the world.

The LNG Supply Boom: The Rise of Floating Storage Global LNG supply continues to climb: the U.S., in combination with Yamal and Australia, will add nearly 41 MTPA (Metric tons per annum) to world markets in 2017. Additionally, LNG spot prices hit $4 in April of 2016 and approached $10 in early 2017, only to begin a sharp fall below $6 as spring approached. Should LNG enter into a steep contango, gas tankers may become floating storage, similar to what happened with oil tankers during the 20082009 financial crisis. European and American continental gas consumers now buy spot supply at gas hubs, which means that it is reasonable to expect the increase in “homeless” LNG to lead to similar buying at LNG hubs. JERA, the Japanese buying consortium, anticipates sourcing twothirds of supply in the spot market by 2020. As LNG sourcing moves from term to spot, the industry must address seasonal price swings by shutting in capacity, slowing ship voyages, or using LNG gas tankers as storage.

As global LNG supply climbs from 250 MTPA in 2015 to 400 MTPA in 2020, where will the extra supply go? The coming gas surplus may look similar to the secular bear market in oil between 1985 and 2005, when the global oil majors were forced to go downstream during decades of oil surplus building retail gas stations. The LNG industry will look to Floating Storage

Marine Log April 2017  
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