By Bloomberg News
The world’s biggest liquefied natural gas producers and traders have one clear message -- the worst of the corona-led demand crunch is yet to come.
Royal Dutch Shell Plc and Total SA warned the rout in energy markets, where oil and gas prices have plunged to historic lows as the impact of COVID-19 worsened a global glut, will hit hard from the second quarter. The gloomy outlook tempered their reports of buoyant LNG production and sales in the first three months of the year.
The delayed reaction to the market slump is because the largest producers typically sell their LNG under long-term contracts that are mainly linked to oil prices. That means the affect of the current rout in crude won’t be felt for another three to nine months.
Here follows the key takeaways from companies’ first-quarter earnings:
Shell
The biggest LNG trader, with stakes in production plants and extensive trading operations, expects its liquefaction volumes to slip as much as 17% in the second quarter from the first. With more than 90% term LNG sales linked to oil with a lag of 3-6 months, Chief Financial Officer Jessica Uhlwarned that from the second quarter and through the rest of the year, its gas business revenue and cash flow generation will be hurt. The oil major also dropped the Lake Charles LNG project in the U.S.
LNG demand won’t recover to pre-Covid-19 levels until end of 2021
Total
The French major expects deferments in LNG deliveries in the second and third quarters after posting a 27% year-on-year increase in the volumes sold in the first quarter.
“Furthermore, the decrease in oil prices will negatively impact the LNG long-term contract prices from the second half,” the company said.
Eni
The Italian producer already suffered a blow in the first quarter as appetite from Asian buyers’ slumped and a “significantly deteriorated trading environment” affected the earnings of Angola LNG, where it has equity.
Naturgy
That oil-gas price lag is already a pain for the Spanish utility as it wants to renegotiate all of its supply contracts with the exception of those with Cheniere Energy Inc., the biggest U.S. LNG producer. The company buys most of its LNG through oil-linked contracts, which are still relatively expensive, and sells at rates tied to prevailing gas-hub prices. This has created such a mismatch that Chairman Francisco Reyenes Massanet said he’s to go to arbitration to seek fairer prices if an amicable solution with its suppliers isn’t found.
ExxonMobil
CEO Darren Woods said on a call with analysts on May 1 that April will likely mark the worst impact of Covid-19, and expected to “shift” schedules for large LNG projects. For one of them, the $30 billion Rovuma LNG plant in Mozambique, Exxon last month pushed back the final investment decision from this year.
Chevron
For another U.S. major with global projects, LNG contract sales have been unaffected, CEO Michael Wirth said on a May 1 analyst call. “Despite some logistics challenges, our supply chains have been functioning with no major disruptions,” he said. But like its peers, the company expects its mainly oil-linked LNG deals to reflect the slump in crude prices eventually.
BP
BP Plc noted reduced LNG demand amid the pandemic and deteriorating economics of U.S. LNG exports. Covid-19 also meant that BP had to delay by one year works at its planned project in Mauritania and Senegal, prompting it to say it won’t be ready to receive a floating gas plant on the 2022 target date.
