Just as U.S. LNG exports were beginning to recover from months of market-driven cargo cancellations, major Hurricane Laura has cut the rebound short. With Laura taking aim at the Texas-Louisiana border — the location of two large-scale LNG export terminals, including the U.S.’s largest export facility, Cheniere Energy’s Sabine Pass Liquefaction terminal — total feedgas flows to U.S. terminals the past two days dived to fresh lows for 2020 and the lowest since February 2019. Gas production is also way down, with offshore Gulf of Mexico production shut-ins compounding the effects of already depressed drilling and completion activity this year. But production has the potential to rebound more quickly than LNG exports, which could exacerbate the onshore demand effects of the storm; It already will bring cooler weather and drench gas demand for power generation as it moves inland over the Southeast and into the Mid-Atlantic states. Today, we look at how LNG exports are being affected by the storm and what that could mean for the overall gas market balance in the coming days.
Yesterday, in Part 1 of this series, we looked at the potential hurricane impacts to critical energy infrastructure at Mont Belvieu, TX, the center of NGL storage and fractionation. Today, we turn our attention to the potential impacts on the natural gas market, particularly one of its key demand sources: LNG exports.
Hurricane impacts to the Gulf Coast natural gas industry are nothing new. Before the Shale Era, when the bulk of U.S. production was concentrated in the Gulf of Mexico, hurricanes used to be primarily a bullish supply risk for the gas market, with shut-ins taking critical supply volumes out of the market for stretches of time. But as the concentration of production shifted onshore to shale plays, hurricane impacts became more of a bearish risk, with the demand loss as a storm moved inland more than offsetting the production impacts.
What has changed, though, is that nearly 10% of U.S. gas demand now comes from LNG export capacity (at normal utilization), the bulk of that along the Texas and Louisiana Gulf Coast. As the fastest-growing source of demand for domestic natural gas, the emergence of LNG exports along the Gulf Coast in recent years has flipped onshore transportation patterns, changed price relationships and become a critical component for balancing the gas market. And, that demand is now subject to all kinds of factors that previously weren’t on the gas industry’s radar, from shipping accidents to fog and major hurricanes, basically anything that impacts shipping activity and coastal operations, all of which have implications for feedgas deliveries and ultimately domestic gas demand. In other words, hurricanes now pose an additional risk to gas demand even before they come onshore and potentially for days or weeks after the storm has passed (we’ll get to why in a bit.)
As we’ve said in previous blogs about hurricane impacts (see After the Storm Part 3), the physical impacts depend on a host of variables, such as the path, intensity and longevity of the storm on the water, as well as the onshore path, the amount of rainfall and flooding it brings, how long it lingers in infrastructure-dense areas, how it affects personnel presence at facilities and what happens to the power grid, among other things. Depending on the path and strength of the storm, ports begin their hurricane safety protocols, suspending pilot services and closing traffic for inbound and/or outbound vessels. Inbound vessels heading to terminals for LNG loading have to be diverted or left floating at a safe distance from the storm path. In fact, many shipping companies will not let their ships enter the Gulf at all if there is an active hurricane in progress. Personnel sometimes have to be evacuated. And once the storm passes, there’s still the aftermath, waiting for any flooding and other physical impacts to subside, bringing personnel back and returning operations to normal, all of which takes time.
Figure 1. Map of Major Hurricane Laura Path and In-Path LNG Export Terminals. Source: RBN MIDI
[The map above shows the location of Laura’s eye and the hurricane’s projected path as of Wednesday afternoon, 8/26/2020. For the most up-to-date projected path and cone of uncertainty, click here to view RBN’s interactive MIDI map platform. By toggling layers in the red options box in MIDI the map also details Mont Belvieu’s fractionation complex and major connecting NGL pipelines from yesterday’s blog.]
With Laura bearing down on the Sabine Pass and Cameron facilities as a devastatingly powerful hurricane this week (see map in Figure 1), storm effects were already being felt in the days leading up to landfall and as the storm moves inland, we’re likely to continue seeing the after-effects for some days. Cheniere’s Sabine Pass facility, as we mentioned above, is the largest U.S. liquefaction and export facility with five trains totaling 25 MMtpa of capacity and feedgas requirements totaling upwards of 4 Bcf/d. Sempra Energy’s Cameron LNG, also a large-scale facility, brought on three trains in recent months totaling 12 MMtpa, or 1.6 Bcf/d, of capacity. [The details of both facilities were covered in this week’s Drill Down Report – Undone.] By Tuesday, confidence in Laura’s track toward the Texas-Louisiana border grew, as did expectations that the storm would make landfall as a catastrophic Category 4 hurricane. Cheniere on Tuesday said it was suspending operations and evacuating personnel. Cameron initially said it was reducing operations with its “ride-out” team of essential personnel, but by Wednesday afternoon, Cameron too said it would shut down ahead of Laura’s landfall Wednesday night or early Thursday morning. Upwards of five LNG vessels were reportedly also either waiting or being diverted to alternate ports.
As we discussed earlier this week in the As Long As the Price Is Right blog (and have been tracking on a weekly basis in our LNG Voyager report), feedgas deliveries to export terminals already were depressed this summer due to the poor economics of U.S. LNG in an oversupplied global market and the resulting stream of cargo cancellations. But activity had picked up in August as economics improved and feedgas deliveries rose to 5 Bcf/d by late last week, after slumping just below 3.5 Bcf/d in July (purple line in red dashed oval of Figure 2). But, with the terminals in Laura’s path ramping down, total volumes fell off to just 2.77 Bcf/d by Wednesday, the lowest in 2020 and also since a very brief downturn occurred in early February 2019. Feedgas demand already had been running about 1 Bcf/d below last year, but with this latest drop, it’s now more like 3 Bcf/d below year-ago levels.
Figure 2. Total Feedgas Deliveries to U.S. LNG Export Terminals. Source: RBN NATGAS Billboard
Figure 3 shows the recent feedgas intake volumes at the individual Gulf Coast facilities. Prior to the storm, Sabine Pass (orange line) had returned to taking a consistent 1.5 Bcf/d of feedgas, indicative of full utilization of two trains. That was well below its peak earlier this year just above 4 Bcf/d, before the cargo cancellations, when all five trains were running full tilt. As the facility suspended operations, volumes dropped to zero starting with Tuesday’s gas day. Interestingly though, feedgas to Cheniere’s Corpus Christi facility (green line), which were also down during the summer due to cargo cancellations, almost doubled yesterday to 1.1 Bcf/d, after averaging about 700 MMcf/d in recent weeks. That suggests that Cheniere may be offsetting disruptions at Sabine Pass by ramping up utilization at Corpus Christi, which is mostly unaffected by the storm.
Feedgas to Cameron (blue line), which was less affected by cancellations this summer, had been trucking along near the 1.5 Bcf/d level more or less since early July. But initial data for Wednesday’s gas day showed a drop in volumes to less than 500 MMcf/d and are likely down to zero now, given Cameron’s decision to also shut down operations.
Figure 3. Feedgas to Gulf Coast LNG Export Terminals. Source: RBN NATGAS Billboard
The 2 Bcf/d or so of demand loss from LNG exports over the past few days, or even the 3 Bcf/d year-on-year exports deficit may not seem like much right now, especially since volumes weren’t at their highest before the storm due to cancellations.
The demand-side losses also seem modest compared to the relatively more substantial declines in production on the supply side of the equation. Daily supply-demand data from our NATGAS Billboard report shows Lower 48 U.S. production is down around 4 Bcf/d since last Friday to less than 84 Bcf/d, which reflects a whopping ~10 Bcf/d or so decline from last year at this time (Figure 4). Production was already down and lower than last year before the storm, as we alluded to earlier, due to the drilling slowdown precipitating from COVID-related demand destruction and low oil prices. The hurricane-related shut-ins of offshore and coastal production exacerbated those declines. Meanwhile, an extreme heatwave across the nation has kept domestic consumption for power generation elevated.
Figure 4. Lower 48 Dry Gas Production. Source: RBN NATGAS Billboard
So, for now, the overall net effects of the storm have been to tighten the supply-demand balance by considerably reducing supply without reducing much demand over the past few days. But that imbalance could easily shift from supply-short to demand-short pretty quickly as the impact of the storm on LNG demand really takes hold and as the storm moves inland, particularly if production rebounds faster than LNG exports and power demand. So what can we expect in the coming days? It’s hard to tell how the timing of the recovery will shake out for production vs. demand, given that a lot rides on how the storm behaves and what it leaves in its wake.
Case in point, during Hurricane Harvey in late August 2017, production fell a little over 2 Bcf/d from pre-storm levels and recovered within days of landfall. Hurricane Barry in July 2019, however, was among the wettest storms on record, including a powerful storm surge and heavy rains in Louisiana. Production fell about 4.5 Bcf/d from pre-storm levels and, while a chunk of that came back online within days of landfall, it took more than two weeks to return to pre-storm levels. As of late yesterday, forecasts were predicting a catastrophic, “unsurvivable” storm surge of as much as 15-20 feet above dry ground along the Louisiana coastline, with storm surge flooding extending 30 miles inland and a lot of rain.
While a good portion of production may rebound in the next week, these conditions suggest it will likely take time for LNG operations to return to normal. While the facilities themselves are built to withstand major hurricanes, the impacts to employees’ homes and other infrastructure in the area can be severe. It could take time for essential personnel to return, and for operations to resume normally. Even under normal weather conditions, it can take somewhere between a week and 10 days to restart the liquefaction facilities. But that’s only after personnel can safely return, and the facility is clear of flooding and other issues and conditions are deemed safe for restarting. Even if the facility is up and running sooner, there’s also the matter of the Gulf and Sabine channel being open for marine traffic. Heavy silting and debris from a storm surge can hamper tanker movement in and out of the channel until it can be dredged and cleared to provide sufficient water depth for tanker drafts.
The bottom line is there are many factors to watch in the coming days that will determine market direction. September gas futures prices earlier this gained some ground as production declined and demand remained strong. (The storm impact also means a prolonged reprieve for global markets, reducing their supply as they work through a surplus.) But, with the announcements of the terminal shutdowns and the impending downside in power burn as the storm makes its way north and east, the prompt contract already reversed course and fell yesterday. And, if U.S. production does rebound faster than LNG export demand, prices could very well move still lower.
The song "Laura" was written by David Raksin, with lyrics by Johnny Mercer. Raksin wrote the melancholic melody to be used in Otto Preminger's 1944 film of the same name, starring Gene Tierney and Dana Andrews. Raksin had a short time to come up with the music and said he was inspired by a "Dear John" letter he received from his wife on the weekend he wrote the song. The lyrics were written later by Johnny Mercer after the song became popular due to the movie. "Laura" has been recorded by over 400 artists over the years, including Woody Herman, Dave Brubeck, Julie London, Carly Simon, and Frank Sinatra.
Frank Sinatra's version of the song was recorded at Capitol Studio A in Hollywood in April 1957. It appears as the fifth song on Sinatra's 13th studio album, Where Are You?, which was released in September 1957. It was the first Capitol album Frank recorded without the services of Nelson Riddle, opting for the services of Gordon Jenkins instead. Personnel on the record were: Frank Sinatra (vocals), Gordon Jenkins (arranger, conductor).
Frank Sinatra was an American singer and actor. He has sold more than 150 million records worldwide, making him one of the best-selling music artists of all time. Sinatra has released 59 studio albums, two live albums, eight compilation albums, and 297 singles. He starred in 61 motion pictures, had his own television show in the 1950s, and appeared in numerous other television programs. He has won one Academy Award, 11 Grammy Awards, four Golden Globe Awards, and has three stars on the Hollywood Walk of Fame. He is the recipient of the Peabody Award, Cecil B. DeMille Award, Kennedy Center Medal of Honor Award, Presidential Medal of Freedom, and NAACP Lifetime Achievement Award. Sinatra has an asteroid named after him, and every year on his birthday, the Empire State Building in New York lights up with blue lights in honor of "Ol' Blue Eyes," Sinatra's nickname. He died in Los Angeles in May 1998 at the age of 82.
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