Analysis: Oil majors beat traders, gas rivals to cash in on LNG price spike

Freeport Resources

18/01/2021 23:00

* Asia LNG imports vs spot price: https://tmsnrt.rs/3seluvd
    * Majors and LNG: https://tmsnrt.rs/3sIxx4z
    * Flexible global portfolio key to success

    By Jessica Jaganathan, Benjamin Mallet and Dmitry Zhdannikov
    SINGAPORE/PARIS/LONDON, Jan 18 (Reuters) - Global energy
majors including Royal Dutch Shell and Total are expected to
benefit most from January's gas price spike, beating rival
trading houses and non-integrated producers thanks to their
access to multiple sources of the fuel.
    Asian liquefied natural gas (LNG) prices  LNG-AS  have
rocketed to record highs in January due to low stocks, a cold
winter, global production outages and shipping delays. They have
outpaced prices in much of Europe and the United States, where
gas is abundant, creating an arbitrage opportunity for sellers. 
    Several companies and traders have rushed to meet the Asian
demand, but have struggled to find volumes for quick delivery.
    However, majors such as Shell  RDSa.L  and Total  TOTF.PA ,
with access to multiple sources of gas, have been able to
re-route U.S., Nigerian and Qatari gas tankers previously
destined for Europe to Asian markets.
    "Some of our long-term contracts include possibilities for
diversions. We are 'reshuffling' cargoes that are flexible to
direct them to premium markets," said an executive with one
major, speaking on condition of anonymity.
    "On the European market, we can still buy pipe gas and
therefore substitute it for a commitment to supply LNG. Once
your delivery commitments in Europe are covered in pipe gas, the
cargoes that were planned for this area can be repositioned
where there is demand," he said.
    Shell declined to comment. Total had no immediate comment.
    The regional difference in price, excluding shipping and
other costs, is currently huge.
    U.S. gas futures for February at the Henry Hub  NGc1 
benchmark currently trade at around $2.60 per million British
thermal units (mmBtu). In Europe, prices at the Dutch TTF hub
are around $10 per mmBtu  TRNLTTFMc1 , while in Asia they are
just under $30  JKMc1 .
    "Traders don't have such flexibility but majors do,
especially those with access to Qatari gas," said a source
familiar with Qatar's state firm QP.
    Qatar, Australia, Russia and the United States are the
biggest producers of LNG, accounting for 70% globally.
    RBC Capital Markets says Equinor  EQNR.OL , Shell and Total
have the biggest exposure among majors to gas prices.
    "We see Shell as advantaged by its exposure to the strength
of LNG prices, although Total should also be a beneficiary,"
Barclays said in a note.
    Data intelligence firm Kpler’s shiptracking data showed
Shell and Total diverting cargoes with Nigerian and U.S. LNG to
Asia, with several other cargoes also changing destination
towards Asia, though charterers were not clear.  urn:newsml:reuters.com:*:nL1N2JQ0HG
    Peter McNally from consultants Third Bridge said U.S. firms
Cheniere  LNG.A  and Freeport should also benefit as they had
volumes available for Asia.
   
    PANIC BUYING 
    LNG has emerged as a flexible and often cheaper alternative
to pipeline gas over the past decades, but it still represents
only about 10% of the total natural gas traded globally.
    The lion's share of LNG is sold based on long-term
oil-indexed deals, but around a tenth of the market is spot,
with flexible prices. 
    The current price spike affects mostly spot LNG, while
long-term deals are currently being priced at around 11-13% of
the Brent crude price, or around $6-$7 per mmBtu.
    "Spot LNG in Asia is now like toilet paper rolls during the
pandemic - you look at the empty shelves and you grab the last
one at any price," said a second executive with another major
trading desk.
    Surging LNG prices are giving Qatar an incentive to quickly
expand its projects and will support many struggling LNG plants
in the United States.
    But the spike could also undermine the formation of a
flexible spot LNG market as many buyers may prefer to stick to
long-term oil-indexed deals.  urn:newsml:reuters.com:*:nL1N2JQ04A
    "Exposing more to the spot this winter has been a terrible
miscalculation so far. In the coming weeks and months, it will
bring the value of long-term contracts back to light," said the
first executive.

 (Reporting by Jessica Jaganathan; Benjamin Mallet;  Nina
Chestney; Scott DiSavino, Dmitry Zhdannikov. Writing by Dmitry
Zhdannikov. Editing by Mark Potter)
 ((Dmitri.Zhdannikov@thomsonreuters.com;))