As global liquefied natural gas (LNG) benchmark prices continue to fall due to oversupply on account of COVID-19, LNG producers with short-run marginal costs (SMRCs) that exceed spot prices are increasingly looking to curtail production. A Rystad Energy analysis finds that those best positioned to reduce volumes while suffering the least possible financial damage are APAC LNG terminals, specifically the Eastern Australia projects and NWS LNG, plus some US plants that have been operational for a longer period of time such as Sabine Pass and Cove Point. These US facilities were built during recent bullish sentiment, which expected sustained demand growth from APAC buyers; medium sized compressors offered a good mix of low unit production costs and relatively low gas quality variation (i.e. low liquids content). These same factors are now working against producers and, with relatively little arbitrage between feed gas prices and their target customers' benchmarks, it would appear the most economic option for them will be to ramp down production. This means that they will have some capability to reduce LNG production without fully shuttering facilities and could keep some trains online to continue producing vital ethane in preparation for restarting, should prices rise in the mid-term. Additionally, APAC LNG terminals have high feed gas costs, low liquid revenues and smaller LNG compression strings that make them strong candidates for curtailing production. "The word of caution on taking this course of action is that pulling this lever requires a clear exit strategy with a defined threshold in gas prices, at which point renewed production would make economic sense once again — ramping up only to have to halt production again months later could spell disaster," said Dane Inglis, analyst at Rystad Energy. The problem producers face is that since the industry's inception, liquefaction facilities have been designed to run at maximum capacity almost continuously with little capability to throttle production rates. We can attribute this to two key reasons; one technical and one commercial. Technical: Liquefaction terminals tend to use gas-fired turbines to drive compression trains (although this is changing with some facilities considering fully-electric compression strings and sourcing power from the grid), making it very difficult to run these turbines at different power loads. Commercial: There is a strong relationship between production and unit cost. The marginal cost of production on-site is low, with the bulk of cost relatively fixed, propelled by power costs to drive the turbines — which is itself a function of the inlet feed gas cost. Producing one unit of gas less does not result in a linear unit cost decline and could even mean costs remain the same. As such, LNG producers whose SRMC of production exceeds spot prices in a target market generally have limited options: fully shut, partly shut, or undergo uptime cycling. Shutting a terminal would be considered the absolute last resort for a cash-strapped LNG producer, and is a move that would only be undertaken if prices are not expected to become profitable for a long period. The obvious drawback of restarting an LNG plant is that the commissioning of the facility is highly complex. Recent facility start-ups suggest that the full exercise to reach regular cargo exports could last anywhere from between nine and 15 weeks. If the facility operates parallel compressor strings, then shutting off one would allow producers to maintain some strings and therefore either maintain production (and some revenue) or maintain the internal temperature of the Main Cryogenic Heat Exchanger (MCHE), so that start-up in the future would be relatively low cost and quick. Uptime Cycling is also an option for producers to recycle gas, keeping the facility prepared to begin LNG exports in a relatively short time frame. This is cheaper than exporting LNG at a loss but more expensive than shutting the facility completely. — Rystad Energy
