markets review lng recap: more vessels unload, reducing ...€¦ · 30/06/2020 · u.s. lng...

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TUESDAY, JUNE 30, 2020 - VOL. 1, NO. 180

MARKETS REVIEW

LNG Recap: More Vessels Unload, Reducing Floating Storage Levels

The number of vessels floating with liquefied natural gas (LNG) aboard and waiting to discharge at terminals worldwide declined markedly on Tuesday.

ClipperData showed 20 vessels floating, down from 23 a week earlier and a peak of 33 on June 19. Kpler had 13 vessels tagged as floating, compared to 20 at the end of last week. Estimates differ based on how firms define floating storage, which can include varying factors such as time at sea, speed of travel and direction.

Floating storage, an indication of global trade flows and the ability of sellers to find a home for cargoes, has been elevated this year given a ramp in supplies and a lack of demand caused by the Covid-19 pandemic.

LNG imports in Europe, a key market that’s been absorbing excess supplies, have been steadily declining, particularly as un-economic U.S. cargoest have been canceled. Along with the use of excess storage capacity in Ukraine that has slowed injections and increasing gas-fired power demand, supply and demand balances are tightening on the continent.

“We see summer prices recovering slightly in the coming months, capped by the U.S.-European Union arb, with more upside to winter prices,” said analysts at BofA Global Research.

The Dutch Title Transfer Facility and National Balancing Point are trading at a slight premium to Henry Hub after crashing in recent weeks, with higher-cost U.S. supply finally locked out of the market. UK-based consultancy Timera Energy said this week the pricing dynamics are a clear sign that U.S. gas is now driving European prices and influencing other markets given that flexible Lower 48 LNG deliveries are helping to ease the supply and demand imbalance.

In Europe, cheaper pipeline volumes from Norway in par-ticular are helping to lock out U.S. LNG. European traders have also been utilizing excess storage in Ukraine, which was at 62% of capacity on Sunday.

Transmission system operator Ukrtransgaz warned last week that it would need to conduct maintenance from August through October on the Budnice interconnection, a

...cont' pg. 3

Shell Eyeing $15-22B in 2Q Impairments from Covid-19’s Crushing Impact to Demand, Prices 4

Daily Rundown• Floating LNG storage has declined significantly

this week• Slovakia’s transmission system operator

will offer additional capacity and alleviate constraints in Ukraine

• Shell expects to impair up to $22B of assets and said LNG margins are likely to be squeezed

See The Offtake on Pg. 7 for Other LNG Highlights

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TUESDAY, JUNE 30, 2020

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...cont' pg. 4

. . . from Markets Review - LNG Recap: More Vessels Unload, pg. 1

critical outlet for moving gas from Slovakia to Ukraine. However, Slovakia’s system operator Eustream said Monday it would offer capacity at another exit point into Ukraine, alleviating the maintenance constraint, albeit at an additional cost for traders that have already booked capacity on Ukraine’s system.

Asian spot prices were also kept at bay on Tuesday as buyers were more interested in cargoes later in the year. Futures prices remained subdued too, with NGI calculations showing U.S. cargoes out of the money until September, or into January for those without chartered vessels.

U.S. LNG exports again decreased for the week ending June 24, when seven vessels departed with a combined-carrying capacity of 25 Bcf, down



...cont' pg. 6

See NGI’s LNG Glossary Here

CORONAVIRUS

Shell Eyeing $15-22B in 2Q Impairments From Covid-19’s Crushing Impact to Demand, Prices

Royal Dutch Shell plc expects to impair up to $22 billion in the value of its global natural gas and oil assets for the second quarter, citing the challenges from Covid-19 that

from eight vessels that left with 29 Bcf in the previous week, accord-ing to the Energy Information Administration.

Feed gas deliveries to U.S. terminals continued trending above 4 Bcf on Tuesday after dipping below that mark last week, accord-ing to NGI’s U.S. LNG Export Tracker. Henry Hub also continued to rally Tuesday from a 25-year low last week when it settled at $1.482/MMBtu. High storage levels and a decline in natural gas demand, specifically LNG exports, have held the benchmark down.

Still, the latest weather data on Tuesday showing strong heat through the first half of July lifted the August contract.

In other news, Delfin Midstream has asked FERC for more time to complete and place into service onshore facilities to deliver supply to the floating LNG (FLNG) export project under develop-ment offshore Louisiana. The company has requested that the dead-line be extended by one year to Sept. 28, 2021. The Federal Energy Regulatory Commission previously granted a similar extension.

Delfin executives recently told NGI that the company plans to reach a final investment decision by next year on the first of four FLNG vessels.

FERC has also authorized Cheniere Energy Inc. to introduce gas and commission the third train at its Corpus Christi export plant in South Texas. Train 3 is expected to come online in the first half of 2021 and bring the facility’s production capacity up to 13.5 million metric tons/year. n



...cont' pg. 7

have slammed commodity prices and energy demand.The supermajor said it was adapting “to ensure the business

remains resilient.” A revised forecast for long-term gas and oil prices resulted in aggregate impairments of $15-22 billion post-tax.

The mid- and long-term price and refining margin outlook has been revised to reflect the “expected effects of the Covid-19 pandemic and related macroeconomic as well as energy market demand and supply fundamentals.”

The one-time writedowns are seen impacting a



...cont' pg. 8

THE OFFTAKE: LNG IN BRIEFA ROUNDUP OF NEWS & COMMENTARY FROM NGI’S LNG INSIGHT

• China’s LNG imports from the United States surged to 340,000 tons in May, according to Bloomberg. That’s up from 211,000 tons in April, when exports left the United States for China for the first time in more than a year after trade tensions ease.

• Wood Mackenzie: Indonesia’s LNG imports could increase 60% year/year to 3.1 million metric tons in the second half of 2020 despite the Covid-19 pandemic. Re-duced pipeline gas and low spot prices have likely sup-ported strong LNG intake so far this year, the firm said.

• Covid-19 will accelerate India’s energy transition toward natural gas as the pandemic weighs down the cost of the fuel, according to Morgan Stanley.

• “As global oversupply has accelerated, prices for Asian gas consumers have deflated to the greatest extent ever,” Morgan Stanley analysts said. “We believe India is the biggest beneficiary as consumer prices have fall-en 25% and remain structurally low at a time when gas infrastructure is doubling and the advent of renewables is making gas even more prominent in the fuel mix.”

“significant portion” of the Upstream, Integrated Gas and Refining assets.For the impairment testing, Henry Hub is forecast to average

$1.75/MMBtu in 2020, rising to $2.50 in 2021 and 2022, and to $2.75 in 2023. The long-term gas price forecast in 2020 real terms is $3.00.

Brent oil is assumed to average $35/bbl this year, $40 in 2021, $50 in 2022 and $60 in 2023 and beyond.

Around $4-6 billion is set to be impaired within the North American unconventional and Brazil projects. In the Integrated Gas segment, $8-9 billion of assets are likely to face one-time



writedowns, primarily in Australia, including the Queensland project on Curtis Island and the Prelude floating liquefied natural gas (LNG) project in the Browse Basin.

In addition, a writedown of $3-7 billion is expected “across the refining portfolio.” The pre-tax impairment overall is esti-mated at $20-27 billion. Additional well write-offs are likely to be $250-350 million versus 2Q2019, with no cash impact expected in 2Q2020.

Management said “the range and timing of the recognition of impairments in the second quarter are uncertain and assessments are currently ongoing. The revised outlook for commodity prices and refining margins could impact overall deferred tax positions, which will be reviewed after the finalization of the operating plan later in 2020.”

Impacted LNG MarginsShell also updated its production outlook for the second

quarter, estimating output at 880,000-910,000 boe/d. LNG lique-faction volumes are set to be 8.1-8.5 million metric tons for the second quarter.

“Trading and optimization results are expected to be below average,” Shell noted. “As previously communicated, more than 90% of our term contracts for LNG sales in 2019 were oil-price linked with a price lag of typically three-to-six months. Conse-quently, the impact of lower oil prices on LNG margins became more prominent from June onwards.”

Cash flow from operations in the Integrated Gas segment “can be impacted by margining resulting from movements in the forward commodity curves,” Shell said. “Margining inflows are not expected to be significantly different from those received in the first quarter 2020.”

Within the Upstream segment, production in 2Q2020 is forecast at 2.3-2.4 million boe/d.

“Although this production range is higher compared with the outlook previously provided, it has had a limited impact on earnings in the current macro environment,” Shell noted.

Refinery utilization in the Oil Products segment is estimated at 67-71% for the second quarter. Realized gross refining margins “are expected to be significantly lower compared with the first quarter 2020 and are expected to be offset by higher trading and optimization results,” Shell said.

Oil Products sales volumes in 2Q2020 are expected to be 3.5-4.5 million b/d, “driven by a significant drop in demand related to the impact of Covid-19.”

“The refining asset valuation updates reflect Shell’s strategy to reshape and focus its refining portfolio to support the decar-bonization of its energy product mix, leveraging assets and value chains in key markets,” management said.

“The Upstream and Integrated Gas asset valuation updates, including related exploration and evaluation assets, are largely driven by the change in long-term prices with some impacts due to a changed view on the development attractiveness.”

In addition, a revision in the decommissioning and resto-ration provision discount rate assumption to 1.75% from 3% reflects “a lower interest rate environment,” which has impacted the asset values tested for impairment.

In Shell’s Chemicals segment, manufacturing plant utilization

is expected to be 75-79% in 2Q2020, with sales volumes of 3.4-3.7 million metric tons.

Meanwhile, gearing is expected to increase up to 3% because of the impairments, Shell noted. Gearing, which measures a company’s financial leverage, is the extent to which operations are funded by lenders versus shareholders. When the proportion of debt-to-equity is high, a company is considered to be highly leveraged.

“Additional impacts to reported gearing levels are expected due to pensions revaluations associated with the current interest rate environment along with other usual quarterly movements,” Shell noted.

Second quarter results are scheduled to be issued on July 30.

‘Fundamental Change’ Across SectorWood Mackenzie expects more operators to impair assets

because of Covid-19. BP plc signaled earlier in June that it plans to impair $13-17.5 billion in 2Q2020 on the “enduring impact” of the pandemic.

“The major oil companies are going through a process of reassessing long-term oil price assumptions and investment hurdle rates as a result of the oil price crash and the coronavirus,” said Wood Mackenzie’s Angus Rodger, director of the upstream research team. “BP and Shell are just two of the companies that have announced recent changes.

“Cutting long-term price assumptions will generally result in a lower valuation, for certain assets to below the accounting value held on the balance sheet. That’s what will trigger an impairment charge. This process has further to run, and we expect further large impairments to occur across the sector.”

The price crash and pandemic already have wiped an esti-mated $1.6 trillion off Wood Mackenzie’s valuation of the global upstream sector, he noted.

Wood Mackenzie’s Luke Parker, vice president of corporate analysis, said Shell’s impairment “is about more than an account-ing technicality or an adjustment to near-term price assumptions. It’s about fundamental change hitting the entire oil and gas sector. Within this writedown, Shell is giving us a message about stranded assets, just like BP did a few weeks ago.”

It’s part of a wider trend, Parker said. ...cont' pg. 10



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NGI’s LNG INsIGht

tuesday, JuNe 30, 2020

VoLume 1, No. 180

“Just a few years ago, few within the oil and gas industry would even countenance ideas of climate risk, peak demand, stranded assets, liquidation business models and so on. Today, companies are building strategies around these ideas. Demand might still grow from here, and many companies are still chasing a share of that growth. But make no mistake, the corporate landscape is changing, and the majors are changing with it.” n

markets review lng recap: more vessels unload, reducing ...€¦ · 30/06/2020 · u.s. lng...

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