March 10, 2020 Read More →

Oil price war boosts uncertainty for developers of U.S. LNG projects

S&P Global Market Intelligence ($):

Saudi Arabia’s oil price war with Russia spelled more pain for the U.S. LNG sector in the near term and trouble for new U.S. LNG projects, even though it could ultimately help balance an oversupplied global natural gas market.

The U.S. LNG sector was already grappling with a supply glut bumping up against the demand shock of the coronavirus before plummeting oil prices heightened worry over the global economy and sent LNG stocks tumbling as part of an overall rout of U.S. stocks. American crude oil futures fell on March 9 to near $30 per barrel.

The oil price crash raised the possibility that a collapse in shale oil drilling will result in a reduction of associated natural gas production, reigning in some of the global oversupply of gas. Domestic gas prices could rise, benefitting long-struggling gas producers in Appalachia. But weak global demand for LNG could also mean less of an outlet for domestic gas.

“The main issue we don’t know today is whether demand or supply will fall faster,” said Nikos Tsafos, a senior fellow with the energy security and climate change program at the Center for Strategic and International Studies. “You can take some associated gas off the market, but if you have nowhere to sell the LNG to, you might be taking off quite a bit of demand at the same time. We just don’t know which of these two factors are going to be moving faster.”

The meltdown in crude oil markets also cast doubt on the appetite for investments in multi-billion dollar energy infrastructure such as LNG terminals. “Major new capital investment seems largely off the table,” energy analyst Katie Bays, co-founder of research and consulting firm Sandhill Strategy, said in a March 9 note to clients.

There are a dozen or so export facilities being developed in the U.S., but many LNG developers have struggled to secure the long-term contracts they need to secure financing and advance to construction. Several developers had already delayed targets for commercially sanctioning their projects.

[Corey Paul]

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