LNG in the New Oil Price Era

The factors influencing the oil price are varied and many have demonstrated themselves in the past 24 months both in terms of demand and in terms of supply putting downward pressure on the price of crude oil and oil products.

In the main shale/ tight oil plays of the U.S. Lower 48 the falling number of wells drilled and completed for production has halted overall US production growth. However, advancements made since 2014 in enhanced oil recovery techniques, reductions in drilling and cash operating costs together with the current WTI price of some US$ 50 per bbl, now enable the international and the larger domestic E & P companies operating in this oil play to achieve full cycle economics equivalent to an IRR of 10%, the level required to secure financing for their operations.

A high number of drilled but uncompleted wells are likely to allow U.S. shale/ tight oil production to resume at the current WTI price levels, but a fast revival of the E&P industry is under question when the dispersion of high pressure pumping crews used for hydraulic fracturing and completion of wells is taken into account.

The oil price outlook is likely to be impacted by supply side and demand side wild cards. Although this is the case and when assuming no further major deterioration of geopolitical situations, the oil price could fluctuate between US$45 and US$60 in the short to medium term. Gas production and, therefore, the price of gas will be influenced by oil market economics, as increases in oil – related E&P activities likely will pull E&P resources away from gas in North America. A price increase to US$ 3-3.5 MMBtu is likely to be required for the gas market in the U.S. Lower 48 states to balance in the medium term. This price level could ease after 2018 as most drilled, but uncompleted gas wells or gas DUCs are concentrated in areas of pipeline capacity shortages, and these shortages are due to be removed in 2018 and beyond.

US delivered ex ship or DES LNG cargos bound for Asia can currently not be delivered above the short run marginal cost of production, when compared to ICIS Heren East Asia Index for LNG pricing. LNG produced in the U.S. is already uncompetitive, despite the current low level of Henry Hub gas prices. Should Henry Hub prices rise in the future as predicted, U.S. LNG will become even less competitive in Asian markets and Europe is likely to be an alternative destination of “last –resort” for flexible LNG cargoes.

US LNG projects under construction will be adding substantially to the current total global LNG oversupply, particularly in the 2018 - 2020 period. Floating Storage Re-gasification Units or FSRU technology appears to be an innovative solution for both buyers and LNG developers, as it creates additional LNG demand in smaller, newer markets. But oversupply will remain a problem for years to come, also beyond 2020, putting further pressure on LNG supply chain costs and helping buyers command new, unprecedented allowances in long term LNG agreements. 

Click here to read LNG in the New Oil Price Era by Morten Frisch in full.