US gas price lift of little cheer as Asian demand disappoints

A record end-of-year rally in United States natural gas prices has brought slight relief for shale-heavy BHP Billiton, but has done little to lift the gloom for Australian LNG producers, as new forecasts for declining demand in South Korea add to the already-gloomy market outlook in Asia.

In the US, the gas price benchmark, known as Henry Hub, is trading near a six-week high after surging16 per cent over Monday and Tuesday on predictions of a cold snap across much of the US.

The lift in prices comes as the US is preparing to begin its first LNG exports from the Lower 48 states.
The lift in prices comes as the US is preparing to begin its first LNG exports from the Lower 48 states. Photo: Bloomberg

At more than $US2.30 per million British thermal units, prices have climbed 27 per cent from 16-year lows on December 16. But they are well off levels north of $US6 seen in February 2014, doing little to ease concerns that BHP may face another round of write-downs on its shale assets in Texas, Louisiana and Arkansas, which were bought when gas prices were about $US4.

The lift in prices comes as the US is preparing to begin its first LNG exports from the Lower 48 states, with the first cargo from Cheniere Energy's Sabine Pass terminal in Louisiana due in January, kicking off a wave of new supplies from the Gulf coast.

New Australian LNG supply is contributing to a market glut in Asia.
New Australian LNG supply is contributing to a market glut in Asia. Photo: Robert Shakespeare

"You'd have to expect US prices would increase, with exports starting up as well," EnergyQuest consultant Graeme Bethune said.

But the US exports are coming just as Asia is already facing a glut due to soft demand and a flood of new supplies from Australia. Asian spot LNG prices have sunk about 60 per cent since the northern summer of 2014.

Advertisement

'Marginally positive'

The new US supplies are expected to add further downward pressure to prices as the government continues to debate a suitable volume for gas exports.

A report released by the US Department of Energy this week found that increasing US LNG exports to 20 billion cubic feet a day by 2040, beyond the 12 bcf/day currently envisaged, would be "marginally positive" for the economy, with the impact of greater investment and increased profitability of US producers outweighing the hit to gas users from higher domestic prices.

The modelling by Oxford Economics and the Centre for Energy Studies at Rice University found that US exports at the higher level of 20 bcf/day would increase US prices by 4.3 per cent on average over 2026-2040. Meanwhile LNG prices in key import markets in north Asia would be 6.8 per cent lower than in the scenario where US exports are just 12 bcf/day.

Cthat Bernstein Research says will hit the markets over the next three years, representing more than a third of current demand. It is predicting overcapacity of 20 million to 30 million tonnes a year will dog the market until 2018.

"A global glut of gas has arrived," Bernstein analyst Neil Beveridge said.

Part of the problem in Asia has been lower than anticipated demand in some key markets, in particular China, the world's biggest growth market for LNG, but also in Japan and South Korea, the largest importers.

Demand expected to fall

This week, South Korea's Ministry of Trade said it expects LNG demand to fall 5 per cent over the next 15 years because of a sharp drop in gas used for power generation, which more than offsets higher industrial and household use.

Japan's government has forecast its LNG imports will shrink to 62 million tonnes a year by 2030 from 90 million tonnes at present.

The restart of nuclear reactors in Japan is pointing to a "normalisation" of nuclear policy since the Fukushima disaster, meaning less reliance on gas, Tokyo-based consultant Tom O'Sullivan at Mathyos said.

Still, Woodside Petroleum is targeting South Korea and Japan for LNG sales from its proposed Browse floating project in Western Australia, which it hopes to sanction in the second half of 2016. Woodside is understood to be aiming to win contracts that replace expiring supplies.

Meanwhile, the first LNG export cargo from Origin Energy's $24.7 billion Australia Pacific LNG project in Queensland look set to slip into 2016, missing a year-end target given less than three weeks ago.

"Origin advises that Australia Pacific LNG's LNG plant on Curtis Island continues to ramp up production, with loading of the first LNG cargo due to commence over coming days and the first export to occur shortly thereafter," a spokeswoman said on Wednesday.