• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 10 hours How Far Have We Really Gotten With Alternative Energy
  • 9 days They pay YOU to TAKE Natural Gas
  • 5 days What fool thought this was a good idea...
  • 8 days Why does this keep coming up? (The Renewable Energy Land Rush Could Threaten Food Security)
  • 3 days A question...
  • 14 days The United States produced more crude oil than any nation, at any time.
Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

LNG Markets May Not Recover Until 2021

Natural Gas

The cash margin for U.S. LNG exporters improved slightly in the second quarter, but will likely remain negative for the duration of 2020, according to a new report. The LNG glut is hurting both buyers and sellers. In Japan, the largest power generator, JERA, is losing tens of billions of yen because it has contracted to buy LNG at prices linked to crude oil, but because it cannot use all of the gas, it typically resells some cargoes. The problem is that JERA has to resell cargoes on the spot market, where prices are much lower than the oil-linked price. In effect, the group is buying high and selling low.  

The worldwide glut has funneled more natural gas into storage around the world. With storage elevated in Europe, the market signaled that supply cuts were necessary. The U.S., which has the most flexible contracting terms (which the industry sold as a feature), is shouldering the burden of rebalancing. 

The margin for exporting LNG is negative, and could remain negative for the duration of 2020, according to a new report from the Oxford Institute for Energy Studies (OIES). “This means that an average US LNG cargo would not cover its short-run marginal cash costs delivering to Europe or Asia at current prices,” OIES said. 

U.S. LNG exporters have seen dozens of cancelled cargoes because of the glut, although for companies like Cheniere Energy, their finances are somewhat protected because buyers still have to pay fees even if they cancel the cargoes. 

The markets are pricing in an improvement in 2021, which is based on “either a very significant surge in Asian gas demand in 2021 or another round of LNG shut-ins to support the gas price,” OIES said. The report forecasts margins remaining below levels that might signal new investment in new capacity through the end of 2023. 

“It is therefore clearly relevant to ask whether we should expect to see any new US LNG investment decisions being taken in the foreseeable future, especially with buyers not rushing to sign new long-term contracts,” OIES wrote. 

In the short run, cancelled LNG cargoes could divert more natural gas into inventories. U.S. gas storage levels are at the top end of the five-year average range, and Henry Hub prices averaged $1.81 in the first half of the year, a record low for that six-month period.

On the other side of the globe, buyers are growing anxious with an arrangement that has them locked into rigid agreements. The financial losses for JERA are accelerating a push to seek more flexible contract terms, a trend that was already growing in recent years as LNG markets became larger and more liquid (no pun intended). 

Related: Shell’s Big Bet On Floating LNG May Be A Flop

“Long-term SPAs [sales and purchase agreements] with rigid terms are no longer suitable for a rapidly changing market,” Hitoshi Nishizawa, a senior executive officer at JERA, said at a recent energy conference in Japan, according to Asia Times Financial. 

The change occurred earlier in Europe with the steady demise of oil-linked pricing. In Asia, the market evolution has been a bit slower, but now appears ready to accelerate with the oil-linked price so detached from JKM spot prices. “Although Covid-19 issues remain more important at present, there seems little doubt that if this trend persists we could see a real challenge to oil-linked pricing of LNG in Asia, with the JKM marker already becoming an increasingly important price benchmark,” OIES wrote in its report. 

Japan – the largest LNG importer in the world – saw LNG imports decline by nearly 19 percent in May, year-on-year. 


The pandemic-related downturn is hollowing out investment in both oil and gas. The number of projects receiving final investment decisions is expected to fall by 75 percent this year, according to Rystad Energy. The total amount of money funneled into new projects will drop to just $47 billion, a very low number that is actually inflated by a set of projects in Norway and Russia. In 2019, the amount of money invested in new oil and gas projects reached $197 billion.

By Nick Cunningham, Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment
  • Mamdouh Salameh on July 19 2020 said:
    Like crude oil, the global demand for LNG has been very adversely affected by the destructive COVID-19 pandemic and like oil LNG will recover and could face supply deficit during 2022/23 as result of declining investments in new oil and gas projects in 2020 to only $47 bn compared with $197 bn in 2019.

    But unlike oil, Natural gas including LNG doesn’t yet have an OPEC-like organization to support its prices. The time is now ripe for major producers like Russia, Iran, Qatar and other gas producers to transform their 12-country Gas Exporting Countries Forum (GECF) into an OPEC-like organization for gas. The rationale is that this could enable them to create a global gas and LNG market and influence gas and LNG prices exactly as OPEC does with crude oil.

    A key reason why GECF has been unable to control gas prices is that it lacks OPEC’s production-quota provisions. Instead, GECF members try to influence gas prices by coordinating their policies.

    However, an evolving gas-market and a changing geopolitical landscape mean GECF has the potential to develop into a gas organization with a lot of clout in the global gas market similar to OPEC’s.

    But before GECF can transform itself into an organization capable of controlling gas prices, the market must first become international. This is already happening with growing production of LNG around the world. LNG now accounts for 11% of world gas production and that figure is growing. Moreover, an estimated 34% of LNG is now traded on spot markets, where prices are not linked to those of oil.

    Moreover, the continuing surge in LNG capacity is also likely to accelerate the process of delinking gas and oil prices. GECF certainly has the clout to pull it off: Its members control 70% of the world’s proven gas reserves.

    The global demand for global LNG and gas will soon start to accelerate as gas is the pivot for global energy transition. Russia is certainly betting on a huge surge in demand with its ongoing development of new LNG projects with the aim of seizing a 15% share of the global LNG market by 2025.

    Since Russia began LNG exports in 2009 with the Sakhalin-2 project, its exports of LNG have increased by almost five times. The Russian government is helping the country’s largest private gas producer Novatek with its LNG projects in the Arctic.

    The Arctic area could become the key driver of Russia’s natural gas production in less than two decades, as it has the potential to produce 90% of all the gas produced in Russia by 2035 according to Russian official sources. The Arctic region is also key to Russia’s ambitions to be a dominant player in the global LNG market.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

Leave a comment

EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News