NGI's 3Q2023 LNG Market Analyst Takeaways

The globalization of the natural gas market continues at full speed as liquefied natural gas infrastructure development in North America and internationally continues to ramp. See what NGI analysts gleaned from the recently completed 3Q2023 earnings season.

• Kinder Morgan Inc. (KMI) - Noted the International Energy Agency predicts that the U.S. share of the global LNG market will grow from 20% in 2022 to 30% in 2026. To put that in perspective, all of OPEC+ controls over 40% of the global crude oil market. The U.S. will never join any sort of future LNG cartel because of its antitrust laws, but that would be some pretty serious market power.
• KMI: Many LNG exporters are interested in natural gas capacity further upstream to access more competitively priced and diversified supply. If so, does that mean heightened interest in Midcontinent production? 
• KMI: Interestingly, they noted that NextDecade Corp., which reached a positive final investment decision (FID) for the Rio Grande LNG project this summer, likely will require incremental pipeline infrastructure, meaning a potential opportunity for KMI. But Enbridge is already set to feed Rio Grande’s terminal with its Valley Crossing and the yet to be built Rio Bravo Pipeline systems. Trains 1-3 have total nameplate capacity of 17.6 million metric tons/year (mmty), which roughly converts to 2.3 Bcf/d. Multiply that by our 1.09 factor (see below) and that yields feed gas needs of 2.5 Bcf/d. If Trains 4-5 reach FID, that would add another 11.7 mmty of nameplate capacity that we estimate would create the need for another 1.7 Bcf/d of baseload feed gas, for a total of 4.2 Bcf/d. Rio Bravo by itself is scalable up to 4.5 Bcf/d, which would still leave a bit of wiggle room to handle peak LNG production or increased baseload output from future debottlenecking activity.
• KMI: The company multiplies LNG export capacity in Bcf/d by 1.09 to calculate feed gas needs. The figures we hear most often are “around 10%,” so it’s nice to see someone come out with a firm number. 
• EQT Corp. (EQT): Has now agreed to two, 1 mmty tolling agreements – one at Commonwealth LNG and the other at Lake Charles LNG. Both are 15-year terms that would begin in 2027. As the anchor shipper on Mountain Valley Pipeline, EQT is probably getting pretty tired of pipeline delays at this point. 2 mmty, or about 270 MMcf/d, is roughly 4% of their total company exposure. Both projects have yet to FID. Commonwealth is a continuation of their strategy introduced last quarter, which involves diversifying a portion of the 1.2 Bcf/d they deliver to the Gulf Coast into the international markets. But we wonder how might their strategy change if LNG is truly “unleashed” and Pennsylvania gets an LNG export terminal? EQT certainly has been pushing for this. It’s probably a long shot at this point, but it would be a significant form of in-basin demand in the same vein as Shell plc.’s Pennsylvania ethane cracker. 
• EQT: Reported that “a lot” of parties are reaching out to them about LNG. That certainly makes sense, given they are the largest natural gas producer in the United States and they carry an investment grade debt rating. But 100% of their gas production is in Appalachia, so such interest would mean these LNG shippers aren’t concerned about the source of their feed gas being so far away from the Gulf Coast. 
• EQT: Said having somewhere around 10% of their portfolio exposed to international prices feels balanced from a market diversification standpoint. But this would ultimately depend on what type of netbacks they are able to achieve. The 2 mmty they have now is simply putting their “toes in the water.”
• Range Resources Corp. (RRC): No mention of their LNG plans during the call, but per their October investor relations presentation, Range sells 25% of their nat gas production to LNG export facilities and another 25% to end users in the Gulf Coast. How might this mix evolve over time, especially if the company improves its current BB long-term debt rating into investment grade? LNG offtake deals carry a significant amount of risk for buyers so mitigating supply risk helps lower their overall risk profile. Range certainly has the drilling inventory, but shoring up their balance sheet could expand the potential opportunity set for Range should they be interested in gaining more international price exposure.
• Baker Hughes Co. (BKR): Baker Hughes is always good for providing global LNG fundamental data. Per Baker Hughes, Global LNG was up 1.5% year-over-year in 3Q2023. Year-to-date, global LNG demand has reached record levels at just more than 300 mmty, despite “softer than anticipated global gas demand and economic weakness persisting in key LNG markets like Europe and China.” Baker Hughes expects overall 2023 LNG demand to approach 410 mmty, or up 2% y/y. Global nameplate capacity is 490 mmty, so overall effective cap utilization is more than 90%. That’s a tight market.
• BKR: Expects global LNG demand to increase 3% y/y in 2024, with just 15 mmty of capacity coming online (also up 3%). 2025-26 should see favorable LNG fundamentals as well.
• BKR: The firm anticipates the world will see 65 mmty reach FID in 2024 en route to bringing global liquefaction capacity from 490 mmty exiting 2023 to 800 mmty in 2030. 135 mmty of that delta is currently under construction.
• Chesapeake Energy Corp. (CHK): A heads of agreement (HOA) with Vitol Inc. will supply up to 1 mmty of LNG with the purchase price indexed to the Japan-Korea Marker (JKM). Their LNG approach includes downside protection through cancellation optionality. More LNG deals are coming, as they are still looking at having 15-20% of their net production tied to international prices. As to why they’ve tied the LNG deals to JKM and with large trading houses, they think it will take a pretty significant presence in LNG marketing to be successful.  Another factor is CHK still carries a non-investment long-term debt rating, which essentially shuts them out from certain customers and deal types, such as Cheniere’s Integrated Production Management (IPM) contracts, or gas supply agreements with investment-grade producers. U.S. LNG offtake capacity has been especially hot (and competitive) since the Russian invasion of Ukraine. By focusing on signing deals with trading houses, Chesapeake doesn’t have to sit on their hands until the rating agencies take them to investment grade, assuming that is in the cards. Debt rating changes tend to be slow to materialize.
• CHK: Both of their LNG deals are free-on-board; 1-2 mmty with Gunvor and 1 mmty with Vitol. Beyond that, they are free to contract with whomever they choose, but as mentioned above, we believe their opportunity set would increase if they achieve an investment grade debt rating.
• BP plc (BP): Will be the sole offtaker of the 2.1 mmty Woodfibre LNG export project in Western Canada starting in 2027. Woodfibre’s feed gas will come from Pacific Canbriam Energy. Here we are in December 2023, and construction has yet to start.
• BP: The major had a poor quarter in terms of gas trading as a result of a lack of “structure” in the market. CFO Murray Auchincloss said in October: “There was a little volatility in the prompt, but the actual structure of the market, as you looked out across multiple months, wasn't moving around. The reason for that, obviously, is that gas inventories in Europe and the United States were relatively full. So that said, it didn't make sense to put a lot of risk onto the gas side. Instead, we reallocated risk to the oil side. And you saw that oil had a very, very, very strong result. As far as the outlook to the next quarter, without guiding, all I'd say is you need to look at structure. As we head into 4Q, I think gas storage is at 98% full inside Europe. It's at average levels, I think, inside the United States. So, volatility will tell. If there are outages, if there [is] weather, that will tell whether or not there's much structure inside the gas market.”
• TotalEnergies SE (TTE): Looking to grow LNG equity and offtake volumes by more than 50% between 2023-30. The top U.S. LNG exporter is growing a competitive supply from 10 mmty to more than 15 mmty. It’s also the largest European regasification holder.
• Energy Transfer LP (ET): Continues to see significant interest in their Lake Charles LNG project capacity from U.S. producers and international markets. The company is in negotiations with several equity partners that would leave ET with 20% interest. These equity producers are also interested in substantial offtake volumes. To them, the key to Lake Charles is to get the U.S. Department of Energy to extend their export authorization on an expedited basis, something they hope will happen in 1Q2024.
• Shell plc (SHEL): Not announcing anything new with LNG Canada, but expects that project to be in-service by the middle of the decade, although one analyst noted he expects it to be ready by the end of 2024. That, of course, means commissioning cargoes should be forthcoming soon, especially now that construction on TC Energy Corp.’s (TRP) Coastal GasLink pipeline has been completed. In fact, TRP anticipates that “a good portion of 2024” will be a commissioning phase for LNG Canada. 
• SHEL: Their focus isn’t just on the first cargo from LNG Canada, it’s also on the 100th, because that will prove the overall stability of the facility.
• SHEL: Disappointed that Venture Global LNG Inc. has now shipped more than 200 cargoes but continues to claim they are in the commissioning phase. “It is very worrying that the actions of one player could potentially start to undermine confidence in LNG coming out of the U.S.,” said CEO Wael Sawan. Strong language indeed from the world’s largest LNG portfolio player.
• Cheniere Energy Inc. (LNG): Per their 3Q2023 investor relations presentation, Corpus Christi Stage 3 is now 44.1% complete (love the specificity), with the potential for first LNG by year-end 2024. Substantial completion wouldn’t be until more like 2Q2025, 3Q2025, or the second half of 2026.  
• LNG: The global LNG market is still “precariously balance sensitive” to any sign of disruption given the lack of spare capacity in the system. Expect this to continue for the next few years.
• LNG: Global third quarter LNG imports were down 7% y/y thanks in large part to high storage levels (particularly in Europe), price elasticity and conservation efforts. Higher renewable generation had an impact, as well. Lower economic activity also puts downward pressure on industrial demand and electricity generation.
• LNG: China has 110 mmty of regas capacity, with another 95 mmty under construction.
• LNG: Japan’s nuclear availability reached its highest level since the Fukushima disaster and they expect this will create headwinds for gas-fired generation and LNG demand in the country going forward, to the point where they believe Japan’s long-term gas demand is expected to decline gradually through 2040. Currently, Japan is the world’s largest LNG importer with an estimated market share of just below 20%, according to statistics from the International Group of Liquefied Natural Gas Importers.
• LNG: The company believes 130 mmty  or more of LNG supply will be needed beyond what is under construction today, partially because of the decline in production from legacy projects.

• Southwestern Energy Co. (SWN): Actively engaged in talks with a variety of buyers under a range of different commercial structures for LNG. They see the value of portfolio diversification and gaining direct access to more volatile international price indexes, but they are taking what they believe to be a more disciplined approach to evaluating and managing the risk associated with these transactions.  As currently structured, they think that many of the commercial arrangements involving domestic gas supply priced off of international benchmarks push most, if not all, of the risk on to the upstream gas supplier. “Our intention is to enter into internationally priced transactions when those risks become more balanced and when we have the tools available to us that are necessary to effectively manage our exposure.” Might those involve new LNG futures contracts from Abaxx? Abaxx Moves Closer to Launching LNG Futures Contracts – Listen Now to NGI’s Hub & Flow - Natural Gas Intelligence.
• SWN: More on the LNG strategy for the 2nd largest U.S. gas producer (4.0 Bcf/d): “As you know, we're currently the largest supplier of natural gas to LNG exporters, and we intend to retain and potentially grow our portfolio of Henry Hub-based agreements in addition to considering incremental internationally priced arrangements. The one distinction I think we might make at this point amongst our approach against our peers is we're taking a slightly different approach targeting binding transactions on post-FID facilities as opposed to non-binding HOAs with facilities that may or may not have reached FID yet. And so, as I suggested, that does raise the bar on the complexity of the negotiation. So, I think our disciplined approach explains why we're moving at the pace we're moving,” said CEO Bill Way.
• SWN: Just as midstream and oilfield service companies have the inside scoop on planned exploration and production activity, we believe Southwestern has it for forthcoming U.S. LNG export activity, given the amount of sales they make into that medium. And it’s their view that U.S. LNG capacity will materialize sooner than originally expected, with the Plaquemines, Golden Pass and the Corpus Christi projects all on track. “By the time we get to 2025, we see over 4 Bcf/day of incremental LNG demand and the clear need for higher prices to incentivize increased activity with even more LNG on the horizon,” Way said.  
• Ovintiv Inc. (OVV): Company is exploring the potential for LNG exposure down the road for their Montney gas production. LNG Canada and any other export projects in Western Canada are obvious targets, but so too could be facilities located along the U.S. Gulf Coast. For example, both ARC Resources Ltd. and Tourmaline Oil Corp. have entered into IPM contracts with Cheniere. 
• ConocoPhillips (COP):  - Secured 1.5 mmty of regas capacity at the Gate LNG import terminal in the Netherlands, which increases their total regas capacity to 4.3 mmty. They now have selectively secured destinations for half of their Port Arthur LNG offtake in the last six months since they sanctioned the project. The company also has 2.8 mmty of regas capacity in Germany. 2 mmty of that will come from offtake from Qatar, which leaves 0.8 mmty that could be filled out of Port Arthur.
• New Fortress Energy Inc. (NFE): The company’s first Fast LNG unit is in place offshore Altamira, expect commercial start-up by year-end 2023.
• NFE: News media has reported that the company has abandoned their offshore Lakach liquefaction project with Petróleos Mexicanos, aka Pemex.
• TC Energy Corp. (TRP): Targeting FID on Cedar LNG by YE23, but that probably slips into 1Q2024 as sponsor Pembina Pipeline Corp. is now guiding for. 
• TRP: Company has an interest in the Prince Rupert Gas Transmission (PRGT) project for which they have a permitted path. Increasing egress out of the basin increases the value of their NGTL system. But if they can’t fit PRGT within their stated max $6-$7 billion of annual capital expenditures, then they won’t start the project. Then again, this all assumes the pipelines connect to something that hasn’t been in play for more than 6 years. From their website: “Prince Rupert Gas Transmission is a proposed 900 km (559 mile) pipeline that will deliver natural gas from a point near Hudson’s Hope to the Pacific NorthWest LNG Facility near Prince Rupert, British Columbia (BC), Canada. On July 25, 2017, TC Energy was notified that Petronas affiliate Pacific NorthWest LNG (PNW LNG) would not be proceeding with their proposed LNG project near Port Edward, BC. With this news, we are reviewing our options related to our proposed Prince Rupert Gas Transmission (PRGT) project as we continue to focus on our significant investments in new and existing natural gas infrastructure to meet our customers’ needs.”