U.S. LNG explosion squeezes gas markets

A substantial gas export facility could be offline until later this year.

On June 8, a U.S. natural gas export facility on the Gulf Coast of Texas suffered an explosion, knocking the terminal offline. Fortunately, nobody was injured, but the incident could sideline the facility for months, potentially roiling global gas markets at a time when supplies are already tight.

In the hours after the explosion, U.S. natural gas prices – the Henry Hub marker – plunged. The price decline underscored the extent to which liquefied natural gas (LNG) exports have become increasingly influential in the domestic gas market.

On June 14, Freeport LNG published an update, stating that a return to full operations would not occur until “late 2022,” far longer than the initial three-week outage announced in the hours after the explosion.

That news shocked the market, and caused another round of gyrations in gas prices, with Henry Hub prices immediately collapsing by 18 percent, and Dutch TTF prices soaring by more than 20 percent.

“The markets are fully integrated. They are now highly interconnected,” Alex Munton, director of global gas service at Rapidan Energy, told Gas Outlook. “That shouldn’t be a surprise because we’ve seen spectacular growth of US LNG capacity over the last decade.”

With a facility that amounts to nearly a fifth of U.S. LNG capacity offline for several months, the longer-than-expected outage means more supply will be trapped in the U.S., while fewer cargoes will make their way abroad.

The U.S. has LNG export capacity of about 13 billion cubic feet per day (bcf/d). “When Freeport went offline, it was an instantaneous drop of about 2 bcf/d of gas demand,” Lindsay Schneider, an energy analyst with Houston-based RBN Energy,” told Gas Outlook. Magnifying the price impact is the fact that energy markets were already very tight, and as a result, are very sensitive to small movements in supply and demand, she added.

From the U.S. domestic perspective, there are silver linings, with reduced export volumes softening domestic fundamentals. “The outage means more gas is available to go into storage, potentially for an extended period of time, which could really add up and mitigate a lot of the supply fears depending on how long it lasts,” Schneider said.

LNG disruption tightens market further

But buyers of U.S. LNG have the opposite problem. Europe was already scouring the globe, looking to secure every available LNG cargo. Between January and May 2022, European imports of LNG have surged by 66 percent compared to the same period a year earlier, an all-out effort to fill depleted inventories and replace gas dependence on Russia.

That huge surge in demand meant that U.S. LNG has become increasingly important. In the weeks after Russia’s invasion of Ukraine, the Biden administration announced a joint U.S.-EU initiative aimed at sending more U.S. gas across the Atlantic.

The explosion at the Freeport LNG terminal throws that effort into question, at least for the rest of this year. “Freeport typically exports 3 to 5 cargoes per week and those will no longer be available for the duration of the outage,” Schneider said.

Freeport LNG “had been running close to capacity in recent months,” Zongqiang Luo, an analyst with Rystad Energy, wrote in a June 13 note. The “bulk of the volumes” from Freeport have gone to Europe, Luo said, especially in the wake of the war in Ukraine. Freeport’s volumes to Europe increased from 0.81 bcf/d in March to 1.17 bcf/d in May. The shipments from the single facility have accounted for roughly 10 percent of Europe’s import total.

“While Freeport LNG is offline, it is unclear which alternative volumes could replace the drop in exports to Europe,” Luo said in a statement. “However, with favorable spot prices, countries such as Nigeria and Algeria that are producing well below capacity could increase production to help fill the void.”

Schneider said that Europe is “in a decent position currently.” The enormous volumes of American LNG that have already gone to Europe in recent months helped build up some storage. That gives major European economies a bit of a cushion before next winter. Still, the loss of supply in a market that was already suffering from high prices and a shortage of cargoes is not a welcome development. “The global LNG market is undersupplied currently and the loss of any export capacity exacerbates already challenging conditions,” Schneider said.

Moreover, the outage of Freeport is not the only unexpected hit to supply. “In the last 24 hours, it has not just been Freeport, but also reduced flows from Nord Stream 1,” Munton said. “So, now you’ve got these two things happening together. And those were the major risks to supply heading into the summer that we are now seeing happening together.”

A third risk, which has not played out as of yet, is a big return of Chinese LNG demand. Periodic lockdowns and an economic slowdown have resulted in reduced imports of LNG into China. But if that were to change, that would add another layer of tightness onto the market, and would be a “recipe for a very difficult winter,” Munton said.

Summarizing all the supply and demand forces at play, he concluded: “The risks have just gone up a significant notch.”

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