Anybody's guess where LNG prices are heading

Vol 20, PW 4 (03 Nov 16) Midstream & Downstream

You'd think LNG producers in the US with Henry Hub-linked GAIL supply contracts are worried about low spot LNG priced cargoes reaching India.

But they're not! "As more Australian and US projects come on stream the (spot LNG) market will be very competitive," admits a US-based supplier. "But all the forecasts show global LNG demand will outpace global supply in three to five years." GAIL will be hoping he's right.

Assume an (October 31) Henry Hub price of $3.10 the delivered price of a LNG cargo from the Dominion Cove LNG project in Maryland to Dahej or Hazira today would be $7.35/mmbtu ($2.75 liquefaction + $1.5 shipping) or $7.75/mmbtu ($3.15 liquefaction). Contrast that with a spot LNG cargo at $5.60/mmbtu delivered by Shell to Hazira on October 23 or even lower at $4.89/mmbtu delivered (again by Shell) to Torrent Power on October 4.

"Three years ago Henry Hub index linked LNG was very popular," argues Mangesh Patankar, an analyst with Singapore-based Galway Group. "But since then oil has come down so much they make no sense.

Only if oil goes back up to $70 or $75 can LNG from the US be attractive again." When that happens, argue US suppliers, GAIL will be vindicated. "Henry Hub price will always be the lowest price benchmark," adds a US supplier.

"GAIL has bought fantastic long term investments with its Maryland (Cove Point) and Louisiana (Sabine Pass) contracts."

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