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Hooked on LNG: The Market’s Reaction to Freeport’s Delay

LNG exports have become an integral part of natural gas demand since the startup of Cheniere’s Sabine Pass export terminal in 2016, and subsequently the startup of Dominion’s Cove Point export terminal this year. With four more facilities under construction, that importance is only set to grow over the next couple years. However, it is a very fine line between LNG being important to the natural gas market and the market becoming dependent on new LNG demand. That dependence was on display recently with the announcement of a nine-month delay of the Freeport LNG terminal.

As an illustration of how important LNG has been to overall natural gas demand mix, the graphic below compares deliveries to the Sabine Pass LNG terminal and deliveries to the island of Manhattan. Since this time last year, monthly average deliveries to the Cheniere facility in Cameron Parish, LA have consistently outpaced deliveries into the heart of New York City.

This was even the case during this past January, when the “bomb cyclone” hit, plunging temperatures with wind chill well into the negatives. So, it’s hard to drop the equivalent demand of New York City in the dead of winter into Louisiana and not have a pretty drastic impact on the overall gas market. That goes for future facilities coming online.

The gas market has become reliant on the prospect of LNG demand coming online, especially in the face of a flood of new associated gas coming to market out of the Permian. So, pumping the brakes on that new demand will cause some heartburn in the overall market. And since these new terminals are huge and complex engineering feats, delays with at least some of the projects are not unlikely. Previously, we saw a delay at Dominion’s Cove Point facility of a few months, however, Freeport’s recent announced delay far surpasses that. With the delay of Freeport’s first three trains by nine months, we have effectively cut out 30% and 20% of new LNG capacity coming online in 2018 and 2019, respectively, as the graphic below shows.

How seriously does the market take an announcement like that? Well, the next graphic shows the move in average annual Henry Hub forward curves, before and after the announcement of the trains’ delays on April 19.

The announcement of the delay hit the 2019 curve the hardest, dropping $0.07 day-over-day, while years further out were hit as well, but to a lesser degree.

What does this mean for the US’ supply and demand balance? With all that Permian associated gas and, not to be forgotten, Appalachian gas on the way, how will the market find balance? See our latest edition of the Henry Hub Outlook to find out.

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Matthew Hoza is a Manager of Energy Analysis for BTU Analytics. Currently he is leading the power team in the development of BTU Analytics’ Power View platform, which provides capacity, generation, and power price outlooks for ISOs and utility areas across the US. Previously, Matthew led the natural gas team that develops and maintains outlooks for natural gas production, demand, pricing, and infrastructure, as well as provided bespoke natural gas market analysis. He holds a M.S. in Finance from the Simon Graduate School of Business at the University of Rochester and B.S. in Physics from Florida State University.

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