Henry Hub not as attractive as it was before

Vol 19, PW 21 (30 Jun 16) Midstream & Downstream

Rising Henry Hub prices and falling spot LNG prices are making it almost certain GAIL will struggle to sell R-LNG from its two long-term Henry Hub-linked deals to import US LNG from 2017.

Between April 12 and June 20 this year (2016), Henry Hub prices have jumped from $1.97/mmbtu to $2.74/mmbtu. NYMEX future Henry Hub contracts for January 2017 delivery are now trading at between $3.10/mmbtu and $3.35/mmbtu and expect them to hit $4.20/mmbtu by end-2017.

This is bad news for GAIL's deal to import 3.5m t/y LNG from the Sabine Pass Liquefaction facility in Louisiana for 20 years, signed in December 2011, and its deal to import 2.3m t/y for 20 years from Dominion's Cove Point liquefaction facility in Maryland, signed on April 1, 2013. Under both deals GAIL must pay a fixed contract sales price of $3/mmbtu plus another 115% of the final NYMEX settlement price for Henry Hub futures for the month the cargo is scheduled plus another $0.45/mmbtu which is 15% of the fixed contract sales price adjusted annually for inflation.

Assume shipping costs at $2.80/mmbtu and cargoes delivered under the deal by end-2017 might cost as much as $11.08/mmbtu. Contrast that with recent spot LNG prices.

"Most spot LNG cargoes landing in India from January to June this year ranged between $4 to $6/mmbtu," we hear. "And this trend is most likely to continue for a while."