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The world is flat … at least for global ethylene producers while oil prices are low

On Jan. 20, WTI and Dated Brent closed at $26.54/b and 25.96/b, respectively, the lowest we have seen oil prices since 2003. Since then we have seen prices rise and hover around the $30/b level.
Unlike ethane, naphtha is highly correlated with the price of oil. Therefore, fluctuations in global oil prices will have a major impact on steam crackers, more so in Europe and Asia where most producers utilize naphtha as a feedstock for producing ethylene.
The title of Thomas Friedman’s renowned book The World is Flat suggests that the world is equalizing in terms of opportunity for commerce. In this case, the low oil prices are pushing down global naphtha prices and allowing ethylene producers using naphtha as a feedstock to be more competitive —therefore leveling out the playing field.
Below we see a snapshot of ethylene competitiveness in this low oil price environment by comparing production costs for theoretical 1 million mt/year steam crackers using 100% of the preferred feedstock for that particular region, with the exception of the US ethane/propane mix unit.
gonzalez-steam-cracker-costs
Note: Our cost model uses the net feedstock cost, the difference between the feedstock and co-products, and adds variable costs and general fixed costs to calculate the total cracker production costs. All prices used in our calculations are based on Platts global prices.
Using Jan. 24 prices, the production costs for Saudi ethylene producers are still among the lowest globally in spite of their recent increase in ethane prices. While the production costs for producers in Saudi Arabia have risen, production costs for Northwest Europe, Northeast Asia, and Southeast Asia — typically the highest-cost ethylene producers in the world — have dropped significantly amid the recent fall in global crude prices.
As shown in the chart, production costs for Southeast Asia are at par with US ethane, a big change compared to June 2014 when oil prices peaked and ethylene producers in Europe and Asia were struggling to remain profitable.
To better understand the math behind the charts, let’s first look at the cost of feedstock to produce 1 mt of ethylene for Europe and Asia. Average monthly naphtha prices for Europe dropped by 24% from December to January. Average naphtha prices for Northeast Asia and Southeast Asia fell nearly 30% over the same period.
Using typical steam cracker yields, the price of the amount of naphtha needed to produce 1 mt of ethylene is $836/mt for Europe, $850.38/mt for Northeast Asia, and $813.71/mt for Southeast Asia, still relatively high compared to the price of the amount of feedstock for ethane based crackers in the US and the Middle East. However, the value of the co-products (such as propylene, crude C4s, pygas, gasoil, hydrogen) for naphtha-based crackers is much higher than the value of the co-products for ethane-based crackers.
The value of the co-products for Northwest Europe totaled $657.87/mt based on Jan. 24 prices. The co-products value for Northeast Asia and Southeast Asia totaled $753.57/mt and $784.08/mt, respectively. When we subtract the feedstock price from the co-product values we get the net feedstock prices, one of the three components we use to calculate the total production costs.
According to Platts editor Maithreyi Ramdas, “Traders are saying that with feedstock naphtha prices at around $300/mt, C&F Japan, costs would obviously have fallen for ethylene producers using naphtha.”
“The naphtha/ethylene margins are currently at $625/mt, which is pretty healthy considering typical breakeven levels of $250/mt,” Ramdas added.
“Producers are making money; margins are much higher because of the low naphtha prices,” sources in China said.
Platts Analytics does not expect this to continue unless oil stays at this level or drops even further. According to Bentek’s latest oil forecast, the price of crude is expected to increase back to the $40/bbl level within the next three months, and not expected to hit the $50/bbl mark until March or April of 2017.
In the meantime, producers in Europe and Asia will continue to enjoy high profits due to the lower production costs stemming from the low crude prices. In terms of competiveness, as Thomas Friedman says, “the world is flat” — at least for the moment.

Source: http://blogs.platts.com/

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Go for launch: The space race for mining metals from asteroids gains more focus

The Luxembourg Government announced a series of measures on Feb. 3 that will boost asteroid mining and the visionary use of space resources, according to a statement from the country’s Ministry of the Economy.

It’s the stuff of George Lucas, Jules Verne and James Cameron.

Yes, James Cameron, the film director of Titanic, The Terminator and Avatar, among other Hollywood blockbusters — and who’s also backing a company called Planetary Resources Inc.

In early-2012, Seattle-based Planetary Resources revealed that it planned to mine asteroids for raw materials, ranging from water to precious metals. Asteroids can contain iron, nickel, cobalt, water and platinum group metals (PGMs), often in significantly higher concentration than found in mines on Earth, noted the company.

“We commend the Government of Luxembourg in leading the world by establishing this new resource industry, thereby enabling the economic development of near-Earth asteroid resources,” said Chris Lewicki, president and CEO of Planetary Resources, who added that his company “looks forward to working with Luxembourg.”

Lewicki was closely involved with the lifecycle of NASA’s Mars Exploration Rovers and the Phoenix Mars Lander.

Among the key steps, as part of Luxembourg’s spaceresources.lu initiative, “will be the development of a legal and regulatory framework confirming certainty about the future ownership of minerals extracted in space from Near Earth Objects (NEOs) such as asteroids.”

The mission “is to open access to a wealth of previously unexplored mineral resources on lifeless rocks hurling through space, without damaging natural habitats,” said Etienne Schneider, Luxembourg’s Deputy Prime Minister and Minister of the Economy. “We will support the long-term economic development of new, innovative activities in the space and satellite industries as a key high-tech sector for Luxembourg.”

Luxembourg already has a track record in related sectors, with satellite operator SES, established in in the country 30 years ago and now a major global player in its field.

Targeting liftoff for platinum

According Planetary Resources, a single 500-meter asteroid may contain the equivalent of all the platinum group metals mined in history.

“Because PGMs are ‘iron loving’, when the Earth formed, they all gravitated towards the core,” Planetary Resources explains on its website. “As a result, platinum does not actually occur naturally in the Earth’s crust — all platinum mines on Earth today are the result of asteroid impacts or igneous magma chamber intrusions.”

Right now, platinum holds strong enough value — about $860/oz — that Planetary Resources sees long-term potential to economically return platinum group metals to Earth.

“Such access to a new, abundant supply source would disrupt current price levels and serve as a catalyst for significant innovation,” the company says.

US also nearing the launch pad?

In late November 2015, President Barack Obama signed the US Commercial Space Launch Competitiveness Act (H.R. 2262) into law. This law recognizes the right of US citizens to own asteroid resources they obtain and encourages the commercial exploration and utilization of resources from asteroids.

“This is the single greatest recognition of property rights in history,” said Eric Anderson, co-founder and co-chairman of Planetary Resources at the time. “This legislation establishes the same supportive framework that created the great economies of history, and will encourage the sustained development of space.”

Republican presidential contender Senator Marco Rubio of Florida also lauded the legislation’s passage last fall. “The reforms included here make it easier for our innovators to return Americans to suborbital space and will help the American space industry continue pushing further into space than ever before,” he said. “I’m proud the final bill includes proposals I had previously introduced in the Senate, including one related to commercial recovery of space resources. This bill is an important win for Florida’s space coast and the entire space exploration community.”

China in the space resource race

In 2013, China became the third nation to land on the surface of the moon. In recent days, the government has released some spectacular images from its Chang’e 3 lunar lander and rover.

In 2017, China plans to launch the Chang’e 5 to land on the moon and return with soil samples.

In 2018, China aims to land on the far side of the moon with the Chang’e 4. If successful, that mission would make China the first country to land there. What’s more, according to reports, the 2018 mission will be the first one in the history of China’s space program to be partially funded by private investors.

The US Apollo and Russian Luna missions revealed that several elements were in abundance on the moon — including iron, aluminum, titanium, manganese, magnesium, and silicon — which could explain commodity-hungry China’s race to the far side.

And there are other proposed missions to the far side of the moon: the crowd-funded Lunar Mission One, and the Russian and European Space Agency jointly-planned Luna 27.

If it all sounds far-fetched and far off, in the 1980s, how many of us thought we’d be talking into our watches or seeing cars drive themselves?

Source: http://blogs.platts.com/

Chinese New Year sees no-monkeying-around stance on steel overcapacity

As China takes off for the new Year of the Monkey, the mood for many in its steel industry will decidedly be sombre, judging from the recent slew of warnings several steelmakers have issued, predicting massive losses for 2015.

Over the week-long break, the industry will take time to digest the bitter medicine that the State Council has said would follow, after its announcement yesterday of guidelines to not just eliminate 100-150 million mt of capacity over the next five years, but to manage the resulting fallout from unemployment.

Skeptics may dismiss the news as a familiar refrain they’ve heard one too many times with limited outcomes, but many signs point towards a resolve by the state that is unwavering.

For one, the latest pledges to tackle the problem have been reiterated by the highest levels of the Xi-Li administration – the president and premier themselves – unlike earlier pronouncements, which were issued mainly by ministerial-level organs.

Furthermore, there is now recognition that excess capacity can’t just be wished away without a plan to address the ill-effects of massive job losses. Plans to provide resettlement, retraining and financial compensation to displaced workers and to support companies and local governments that are willing to bite the bullet seem to be a step in the right direction.

In its statement, the government was forthcoming in noting that staggering losses by steelmakers over an extended period have forced the sanguine look into the mirror at the underlying problems of rapid over-investment in the sector.

Out of the country’s ten biggest steelmakers by output that are listed and have issued earnings forecasts, only three expect to turn a profit, while six have flagged staggering losses running into the billions of yuan.

Dirt devil: Airlines filter through info on latest fuel quality issue

At the Platts Middle Distillates Conference in Antwerp, Belgium, in late January, those attending spoke a diesel-focused language, this being Europe where people mostly drive diesel cars even after the VW scandal.

So I had to filter out a lot of information to get any dirt on jet fuel — also a middle distillate. And what did they talk about for jet fuel? Not prices or inventories. But filters. And dirt.

Panelist Mike Farmery can make aviation fuel quality sound entertaining. A longtime global fuel technical manager for Shell Aviation who now runs the consultancy Clear and Bright, he described trends in jet fuel quality to the nearly 100 people at the conference.

He touched on the nearly ended spec battle to allow FAME (fatty acids methyl esters — think Crisco in an engine instead of a fryer) for greater pipeline movement as a biofuel, which jet engine makers have opposed for years. Water contamination and thermal stability issues came up. But those areas have trended for a while in airline circles, where it’s certainly a more serious issue if your fuel fails to perform at 30,000 feet above ground in a plane rather than inches off the ground in a car.

But Farmery noted that more trading and shipping of jet fuel worldwide has meant more time on potentially older, rusty ships. Many refineries around the world have closed and converted into storage terminals in recent years, while new megarefineries in the Far East and Middle East have emerged along with expanded refineries in the US. This trend has increased the shipping of jet fuel and has made managing dirt contamination more challenging.

It’s not hard to get rid of dirt, mind you. But you have to be more diligent, as anybody who’s ever camped in the desert or the beach knows. It’s more time-consuming to put in more or better filters and change them more often. It’s also more costly.

He outlined several cases of problems detected at import terminals, including one European terminal where it took 10 days to process fuel and $150,000 cost in filters that needed to be changed every eight hours.

Farmery also noted that ships are required to come to port with their cargo inert (non-explosive). That usually meaning using carbon dioxide exhaust gas from the engines. Cheap and easy, but it causes more soot and sulfuric acids to get into the jet fuel than normal.

There are tight checks to control particle sizes in fuel coming out of the refinery, and aircraft are ultimately protected by ultra-fine filters on fueling equipment. But fewer checks or just self-assessment checks exist in the middle of the supply chain, so it could be easily overlooked.

Such particulate contamination has risen high on the agenda for jet fuel forums, as experts look at the number and size of particles in the specifications. “The spec just isn’t very good at qualifying what is dirt,” Farmery said.

Import terminals may be the best place to catch the problem, through on-site filtration to deal with problem cargoes. But easier test methods would help, along with contamination limits along many points of the supply chain.

“We can fix it, but it’s about allocating costs and filtration,” he said. “Thirty-five thousand feet is no place to change filters.”

Source: http://blogs.platts.com/

Ask Hunker Harry: Good weather news is bad news for US steel

Punxsutawney Phil, the famous groundhog who predicts the longevity of the US winter each year, did not see his shadow last week, indicating an early spring. This is only the 18th time in 130 years that the groundhog failed to see his shadow. An emcee at the Groundhog Day event in the chilly northwestern Pennsylvania town told those gathered it was OK to remove their coats.

What may be great news for wide swaths of America is likely bad news for the price of ferrous scrap.

Easy collection and a free flow of material unencumbered by freezing temperatures, ice and snow will likely keep scrap supply healthy and prices flat. In the kind of lackluster market US steelmakers have been facing, flat scrap prices mean flat steel prices, or worse.

None other than former Federal Reserve Chairman Alan Greenspan recognized the importance of ferrous scrap as an economic indicator, keeping a close eye on the steel trade press for price movements in the major steelmaking raw material. If scrap prices were on the upswing that was an early signal that steel demand was strong and the economy was strengthening.

Whether it’s for Greenspan or from a groundhog, early market indicators can be golden. That’s why steelmakers should get to know another conjecturing critter — Hunker Harry, a Norway rat.

Discovered in the 1990s oddly perched on his hind legs atop a scrap heap in Hunker, Pennsylvania, Harry caught the attention of an enterprising steel executive who, distrustful of market reports, chartered a helicopter to fly low over the region’s scrapyards to gauge the supply situation for himself. It was Groundhog Day when he spotted Harry. What followed was the mildest winter on record and Harry became a market indicator.

This week, Harry was nowhere to be found, which means there will be six more weeks of winter, higher scrap prices and higher steel prices.

Maybe you never heard of Hunker Harry, but have you ever heard of a Nova Scotian groundhog named Shubenacadie Sam? Or Staten Island Chuck? Or Georgia’s General Beau Lee? How about New Jersey’s Stonewall Jackson? Or Winnipeg Willow?

All these groundhogs except the last two predicted an early spring on Feb. 2, just like Punxsutawney Phil, and perhaps the only reason the last two did not make the same prediction is because they died, oddly, just prior to Groundhog Day.

Source: http://blogs.platts.com/

Will the US’ ‘M’ gasoline be dead like the mummy? Some say yes

Me: “Let’s talk about prices at the pup.”
My many critics: “Don’t you really mean prices at the ‘pump,’ doofus?”
No, in this case I really do mean prices at the pup. Why? No “M.”
Why so glum, chum? Maybe because unfinished gasoline is nudging finished gasoline out of the dog bed that is oil. (Photo by Sara Butler)
Why so glum, chum? Maybe because unfinished gasoline is nudging finished gasoline out of the dog bed that is oil. (Photo by Sara Butler)
The venerable M-grade, a benchmark in the gasoline trade for decades, soon would lose some of its influence under a change proposed by the nation’s largest pipeline, Alpharetta, Georgia-based Colonial. The company, citing feedback from users in Houston last week (February 1), intends to drop M-grade gasoline from its shipping schedule.
It’s said around the Platts office that J.P. Morgan — the person, not the bank — used to trade M-grade gasoline when he wasn’t giving shiny dimes to tots. It influences the price of gasoline going to Mexico. It influences the price of naphtha going to South Korea. It probably influences the price of Flamin’ Hot Cheetos at your local Chevron gas station.
According to a story by Platts’ Amanda Rayborn, much less M-grade has been shipped on the pipeline system compared with the last few decades. Colonial, the nation’s largest and busiest pipeline, links the Houston area to North Carolina via gasoline-only 1.37 million b/d Line 1, and then to New Jersey via 885,000 b/d refined products Line 2.
What’s the beef with M? (Source: Nero-Film)
What’s the beef with M? (Source: Nero-Film)
The pipeline used to have more “M” than the word “mummydom.” These days there’s no timeline for dropping M-grade, a product that has seen a considerable decline in shipping volume, according to Colonial officials.
These are, indeed, tumultuous times for the 87-octane M-grade gasoline. Colonial earlier announced plans to drop M-grade at 7.8 RVP from the shipping schedule, meaning the cash markets will shift focus to the more widely traded 9 RVP gasoline this summer. The 7.8-RVP M-grade was the basis for multiple futures contracts, so that sector of the market will have to alter its trading profile starting soon.
There are signals the grade still matters. Market talk points to considerable blending of M-grade into RBOB blendstock once it reaches the northernmost point of Line 3 at Linden, New Jersey. That’s right — finished gasoline is turned back into blendstock. It’s like turning cupcakes back into flour, but it works in the energy markets.
It’s hard to get a handle on how much M-grade is shipped on Colonial, with that data regarded as proprietary. A good rule of thumb is that there are at least three barrels of CBOB blendstock in the cash gasoline market for every barrel of M-grade gasoline.
And don’t get me started on V-grade. Colonial told shippers late last Friday that V-grade at the lowest-traded RVP, 7.8, might be dropped from the summer shipping schedule. Its fate is being decided separately from M-grade.
For now, it is still relevant. With the “V.”

Source: http://blogs.platts.com/

US scrap industry returns to an event where many were queasy last year

An annual scrap industry event in St. Louis every February has grown in mass and scale over the past decades. Once a regional chapter dinner, it is now a full-scale party that attracts scrap dealers and mill buyers from across the country.

ISRI’s Mid-American Consumers Night banquet on Tuesday evening is the main event, but meetings begin as early as breakfast on Monday. Industry friends begin gathering in the Union Station Hotel lobby well before the start of the banquet, and this year’s event brings back memories of last year, when scrap suppliers were reeling from a February price crash that finalized just days earlier.

The annual open-bar themed banquet rages all night with drinks, food, entertainment, drinks, music, and more drinks. Needless to say some attendees head for the airport Wednesday morning bleary eyed.

At last year’s 68th annual Consumers Night, scrap dealers showed up to the event bleary eyed, having landed in St. Louis looking like they had just seen a ghost. What they had really seen was a $100/lt price plunge, the likes of which had not been experienced this decade.

There was shock, disbelief, and a certain numbness among the dealer base at the event.

Looking back at my coverage a year ago, the first sign of the February price crash were evident in a story published Jan. 19. The headline read “Weak fundamentals undercut US scrap prices.” After raising prices around $20-$30/lt during the January buy week, mill buyers cell phones rang off the hooks, their inboxes were flooded with emails from dealers and they quickly pulled back.

Mills eventually bought at sideways and then shut their doors. Scrap was left unsold and it began to overhang the market, setting the stage for what would soon become the ‘F-word’ for a dealer base — as in “February 2015.”

A year has passed since that fateful February buy week and pricing still has not recovered, but this year’s Annual Consumers Night will have a different feel to it.

Pricing is actually lower now ($190-$200/lt delivered mill for shred in the Midwest) than it was last year post-‘F-word’ ($245-$260/lt). But the supply-side has done a better job of adjusting to this new norm. There is no China to bail us out this time, like there was in the 2008 crash — just hard work and rationalization.

There have been idlings, adjustments, restructuring and, unfortunately, shutdowns and bankruptcies, but for those left standing in this market and on hand in St. Louis this week, there will be a reason to raise a glass and make a toast to surviving.

February 2015 set off a chain reaction in the market, and survival of the fittest is the basis of evolution and efficiency. While 2016 is still young, Tuesday night will be a good chance to assess how things may look for the year. Cheers!

Source: http://blogs.platts.com/

Are oil market uncertainties, falling prices taking the sparkle out of London IP Week?

You know that London IP Week is underway when hundreds of attendees gather at the May Fair Hotel to attend the Platts London Oil Forum, which was Monday. Attendance was so high that the 500-plus participants filled three large conference rooms, linked by live video feed and connected by iPads, which got them sharing their views during a series of crucial updates and panel discussions.

Speculation about the price of a barrel of oil has made its way from the business sections to the front page, and as we fast approach $30/b, the hot topic for presenters and participants at LOF 2016 was: How low can it go?

A live poll on the day showed that there wasn’t consensus amongst attendees, with 30% believing that front-month ICE Brent futures contract will be trading at $35-$45/b this time next year, and 40% believing the price will rise to $45-$55/b. What’s significant is that 21% of those who voted believed that price will fall further, with 7% believing it could drop to as low as $15/b.

What is clear is that the drop in price is having an effect on the industry, and this was evident at London IP Week. Joel Hanley, Platts editorial director for European and African oil, summed it up nicely when he said that there are fewer IP Week parties this year, and the drinks being served have also taken a hit. When Platts hosted LOF 2014, a barrel of oil cost roughly the same price as a bottle of Bollinger La Grande Année Brut 2005, whereas now a barrel of oil is comparable to a bottle of supermarket own label Champagne (Tesco Finest Vintage was mentioned).

If the price continues to drop, Hanley questioned whether it will be comparable to cheaper supermarket Champagne or even as low as a bottle of cheap prosecco — there will still be fizz, but if the supply glut continues, will the sparkle be lost for the foreseeable future?

This supply glut was a key feature of the debate. Hanley reported that OECD countries currently hold 3 billion barrels of oil in stock, an all-time high. Given the close correlation between oversupply and the falling oil price, this issue needs to be addressed, but when polled, 76% of respondents at LOF 2016 did not believe that OPEC would agree to cut it production in 2016.

Weighing up issues which may have an impact on supply and demand in 2016, attendees were also polled on US and Iranian exports and Chinese demand. With the historic lifting of the 40-year-old ban on exports, 53% of respondents believed US crude exports would be sporadic and involve a range of grades in 2016.

Asked about the impact that lifting sanctions would have on Iranian exports, a significant 77% of respondents didn’t think that Iran would be able to regain its pre-sanctions European market share.

And when questioned about Chinese demand, there was less consensus, with 46% of believing that China’s crude imports were likely to grow by up to 3%, and 43% believing this growth could reach 7%.

Platts has reacted quickly to significant industry change and Jonty Rushforth, Platts director of oil and shipping price group, used LOF 2016 to announce the launch of a new Dated Brent Cost-Insurance-Freight (CIF) Rotterdam assessment, as well as discuss new assessments designed to bring transparency to the US Gulf Coast crude and condensate export market.

When polled specifically about the impact of US exports on European refiners, attendees had a range of views. Some 30% of respondents thought any impact wouldn’t be felt until 2017/2018, while 26% believed the impact won’t be felt until after 2018 and 40% thought that US exports won’t have an impact on European refiners at all.

It looks as though 2016 is set to be another year of significant change. From the buzz at LOF 2016, however, it’s clear that business continues.

Source: http://blogs.platts.com/

The US enters a brave new world as it begins LNG exports

Next month, the US is set to export its first cargo of LNG from the continental US. Cheniere Energy, the company that won the highly-contentious race to be the first exporter out of the gate, will have some advantages over its US peers, but the global LNG landscape has changed significantly since the company first proposed to build its LNG export terminal over a half-decade ago.
Before diving into the current state of the world LNG market, let’s take a step back and see how we got to where we are today.
The beginning
In 2001, Cheniere Energy made an announcement to build four LNG import terminals in Louisiana, at a cost of $1.2 billion. As Charif Souki, Cheniere’s CEO at the time, hit the road to raise money, he told investors a simple message: The US is addicted to natural gas and we are running out of it. Therefore, we must import natural gas via LNG from abroad. After seven years, Souki and Cheniere’s vision became a reality, with the inauguration the Sabine Pass LNG import facility in April 2008.
But between 2001 and 2008, the forecast for US natural gas went from gas shortages to gas gluts. Showing off a sparkling new, state of the art LNG import facility, Cheniere was literally trying to sell natural gas into a sufficiently supplied market. It was like trying to sell ice in the North Pole or chocolate to someone in Hershey, Pennsylvania.
Cheniere then set out to do the complete opposite of what the planned to do a decade ago: export LNG. In September 2010, Cheniere was the first company to apply with the US Department of Energy for a permit to export LNG.
The art of a deal
By late 2011, Souki managed to work out a deal for Cheniere to sell $8 billion of LNG over 20 years to BG Group, which is now owned by Shell. In a nutshell, Souki’s pitch was this: US natural gas prices are forecast to stay low because of the abundance of newly-accessible shale gas resources, while natural gas and LNG prices are expected to remain high in Asia.
Why was Cheniere so confident that LNG prices were going to stay high in Asia? At the time, nearly all LNG prices in Asia were linked to oil.
This value proposition was successful, as Cheniere has been able to sell 80% of their LNG export capacity at Sabine Pass under take-or-pay contracts.
The sober start to 2016
Fast-forward to 2016. Cheniere is expected to export its first cargo of LNG out of Sabine Pass this March. As Cheniere, along with other hopeful LNG exporters, know all too well, market dynamics never stay constant and volatility is the name of the game. Commodities are cyclical. When Cheniere and other companies decided to build multi-billion dollar LNG export terminals, there was a large price difference between gas prices in the US and Asia.
pedersen-jkm-lngFor example, the average price for a spot cargo of gas in Asia in 2011, using the Japan-Korea Marker, JKM, was $14.02/MMBtu. A key reason prices spiked was the Fukushima nuclear disaster, which occurred in March 2011, leading Japan to shut 47.5 GW of nuclear generation capacity.
As new LNG facilities came online, prices have faced downward pressure. In 2015, the average JKM price was $7.45/MMBtu, and as of Feb. 3, the average price this year has been $5.73/MMBtu.
Awash in LNG
So how did we get to where we are today? Put simply, demand has recently failed to keep up with supply. Platts unit Eclipse Energy Group data shows global gas demand growth was insignificant in 2015, rising by a mere 700 MMcf/d, while at the same time roughly 2.2 Bcf/d of new export capacity was added. Over the next five years, total global export capacity is expected to grow by an exceptional 133.5 mtpa (17.8 Bcf/d), a 44% increase.
The US as a global swing supplier
Eclipse data shows that by 2020 the US will have become home to 15% of global liquefaction capacity and could become the world’s third largest exporter (behind Australia and Qatar). And due to the inherent flexibility of US LNG tolling agreements, American exporters have a good chance of becoming a swing supplier. Unlike other LNG contracts, US LNG tolling agreements do not have fixed destination clauses, allowing US-sourced LNG cargoes to show greater optionality in spot markets.
pedersen-gas-prices-forecast
The balance between global LNG demand growth and global LNG supply will be the two key variables in determining how quickly and to what extent American LNG plays a role in the global market of the future. Another key factor will be the price of US natural gas. Platts Analytics forecasts Henry Hub spot prices averaging $2.45/MMBtu in 2016 and increasing to $4.19/MMBtu in 2020.
Even though it appears to be a buyer’s market for now, the US is quickly becoming ready for when the tide turns. At this point, the world will find out just how capable the US can be in the LNG market. For now though, at least they can say something that they weren’t able to say a year ago: We are ready to play.

Source: http://blogs.platts.com/

SoCal Gas’ Aliso Canyon gas storage leak raises questions about California markets

The Southern California Gas Company is one of the biggest local distribution companies in the United States, covering much of Southern California, and is a regulated utility within Sempra Energy. One of the wells at its Aliso Canyon storage site has been leaking gas for over three months now, and it’s not expected to be stopped for another month.
We’re not here to comment on the politics or social impact of this event, but we are tracking how this is impacting the California natural gas market. This has really shaken up expectations for the California gas market, as the future of the facility after the leak is repaired is unknown. So why is Aliso Canyon such an important storage facility?
Aliso Canyon is the fourth-largest storage facility in the country, and its 86 Bcf of working gas capacity makes up 64% of SoCal’s total storage capacity. SoCal usually doesn’t even pull inventories down to 49 Bcf, which is the total capacity of SoCal’s other three storage fields. 01-28-16 SoCal gas storageSoCal will not be able to inject into the field until the utility can prove to regulators that all of the other 100-plus wells are safely functioning. SoCal can fill the majority of its demand through interstate pipeline receipts, but it does need to rely on storage during peak demand times of the year.
SoCal demand usually ranges between 2-4 Bcf/d, but can reach as high as 5 Bcf/d on the strongest demand days. The utility could theoretically fill all of its demand on all but a few days a year from longhaul flows to its Wheeler Ridge, North and South Zones, which have capacity of over 3.7 Bcf/d. These interconnects bring gas in to Southern California from the Rockies, Texas and New Mexico.01-28-16 SoCal gas demand
However, these zones never receive enough gas to push near that capacity level, so the rest is filled in with storage withdrawals. Aliso Canyon makes up about half of SoCal’s withdrawal capacity, but the other three fields on SoCal’s system can pull up to 1.8 Bcf/d from storage. This means that if you combine the capacity of the three major zones with this withdrawal capacity, SocalCal’s total capacity to meet demand is nearly 5.6 Bcf/d. Seems like SoCal shouldn’t have any reliability issues with all this capacity, right?

But let’s take a closer look at the utilization of the three major zones. These zones usually receive between 2-3 Bcf/d from long-haul pipes such as El Paso and Transwestern from the desert Southwest, Kern River, and Southern Trails from the Rockies, as well as some from its intrastate neighbor Pacific Gas & Electric to the North. Even though there is a capacity of 3.7 Bcf/d between these zones, there is only 2.6 Bcf/d of contracted firm rights in place to deliver supplies.01-28-16 SoCal gas receipts
When you combine this 2.6 Bcf/d figure with the 1.8 Bcf/d of withdraw capacity without Aliso Canyon, you get to 4.4 Bcf/d. Since demand can reach as high as 5 Bcf/d, there could be some price spikes in order to attract gas to the SoCal Border on high demand days in the winter.
This could be a longer-term issue as well, and there could also be some price spikes next winter if the field isn’t back in operation at that point. SoCal could bring up LNG supplies from the Costa Azul terminal in Baja, California, but prices would have to be pretty high to incentivize LNG dispatch. It’ll be interesting to watch how this shakes out and if SoCal adds incremental contracts from some of those long-haul pipelines.

Source: http://blogs.platts.com/