Officials from the Panama Canal are very bullish on the prospects for transits of LNG vessels through the Canal, especially based on anticipated liquefaction coming online in the US. A recent US Department of Energy estimate suggested that 38m tons of LNG (approximately 550 cargoes) per year could be moving out of the US Gulf to Asian destinations by 2021. Canal officials were heralding a new era in energy transportation. Maybe yes, maybe no; Genscape LNG analyst Ted Michael, an expert on the commercial aspects of the gas markets, is not entirely convinced.
Commercially, the market is changing, with the Genscape analyst explaining that the LNG markets have been in the process of a sea changing paradigm shift over the past few years in a direction that favors increased spot trading of LNG- rather than lengthy contracts that bring about steady and predictable cargo flows. He cites a trend toward “No destination clauses”, which enable gas cargoes to be sold onward from an original destination, rather than only taken at specific location.
Michael told Seatrade Maritime News recently: “The European Union unbundled their supply chains- pushing back on Gazprom, and the Japanese are now similarly pushing for the ability to open up through the no destination clauses.” JERA, a large LNG buyer, has publicly stated that it will scale back its purchases under long term contracts. “The market power has shifted to the buyers.”
Market economics have also changed. The Fukushima disaster in Japan brought about an LNG import surge, and an “Asia premium” developed, where gas prices in Asia (tied to crude oil prices) were as much as $5/mcft higher than those in the Atlantic Basin. But three and a half years later, after oil prices collapsed, the premium disappeared, with
Michael saying: “We may not see that premium back for another ten years.”
Michael, citing deals by EDF and others, pointed to a market where cargo swapping will increasingly become the norm. With Australia set to become the world’s largest LNG producer, it can easily supply Asia- more economically than cargo coming from halfway around the world. Likewise, with little or no price premium (and freight arbitrage) to support faraway sales, gas produced in the Atlantic - even where the Japanese have stakes in the liquefaction trains - will tend towards shorter voyages.
However, Michael expects that there will be price spikes, from time to time, which would create short-term opportunities to ship Atlantic-produced LNG to Asia. “Maybe demand based pricing would work for the Canal,” he suggested.