A perfect storm of cold weather and mismatched supply and demand has pushed spot prices for liquefied natural gas in Asia through the roof in recent months.
As Bloomberg notes, LNG spot prices went from "almost to zero" in April 2020 to above US$30 per MMBTU this week.
“The North Asian price benchmark has now risen 18-fold in less than nine months, outperforming other commodities -- even Bitcoin,” Bloomberg says in a recent report on the LNG spot market surge.
Oddly, the Institute for Energy Economics and Financial Analysis (IEEFA) suggests high LNG spot prices augurs poorly for the LNG industry.
“Vietnam, Pakistan and Bangladesh have over US$50 billion of proposed gas-fired power projects at risk of cancellation from unaffordable LNG prices,” the IEEFA writes. “The extreme volatility of spot prices combined with the increasing volatility of contract prices will see many projects become unbankable.”
In March 2020, the IEEFA made essentially the opposite argument, when it argued low LNG prices “threatens to make LNG-producing plants unprofitable.”
Spot prices are not the measure used when sanctioning projects, whether they are natural gas power plants or LNG production plants. No company or utility would sanction multi-million or billion-dollar LNG plants, receiving terminals or natural gas power plants based on whatever spot prices happen to be doing that year. Typically, long-term contracts are signed for LNG at a fixed price.
The most recent volatility is being driven by multiple factors. For one thing, China is experiencing an unusually cold winter. China has also stopped coal imports from Australia, as part of deteriorating relations between the two countries, resulting in a higher demand for LNG for both power generation and heating.
There were outages at major LNG plants in Australia and Norway in 2020, shipping bottlenecks and soaring transportation costs as a result of a global pandemic that disrupted supply chains.
“Since last year, because of the pandemic, the container shipping rates from Asia to North America have basically doubled compared to normal years,” said Calvin Xu, CEO of True North Energy Corp.
True North is one of the independent shippers that have been buying LNG from FortisBC and shipping it to China via ISO container on container ships.
The recent high spot prices for LNG in Asia are helping to offset some of the cost impediments to shipping LNG from B.C. to China by ISO container, said Scott Neufeld, spokesman for FortisBC.
“The recovery of Asian spot prices is helping to improve the economics for our customers who move Canadian LNG to Asia by ISO container,” Neufeld said.
“In addition to price, shipping costs and logistical issues related to Covid-19 have also hampered ISO exports. As prices recovered this winter, FortisBC sold about 50 containers at the end of the year and expects continued regular shipments through the winter."
While the recent record-breaking Asian LNG spot prices have delivered windfalls to majors like ExxonMobil and Royal Dutch Shell, the prices are expected to start trending down, according to Oilprice.com: “The record-high prices are not expected to last long, as cargoes for March delivery on the spot market are already half the price of those for February delivery."