As we anticipated (and have covered at length in our ESG and Climate service), we see a renewed increase in adding more US LNG capacity as global markets tighten again and as more emerging economies see LNG as a cleaner and potentially cheaper path to broader electrification. There is also talk of changing contract structures to share the pains and gains of LNG price volatility. This would be good for the buyers and is likely to generate more importer interest, but it will challenge some of the independent projects from a financing perspective if more variable price components become the norm in contract construction – this could create a competitive edge for the oil majors over the independents, as they would have less trouble raising the investment funds. One of the enabling factors of the early LNG projects was the fixed nature of contracts and the ability to lock in a largely fixed return for both equity and debt investors.
Source: EIA, Bloomberg, C-MACC Analysis, March 2021
The rise in crude prices, alongside relatively weak US NGL pricing (largely because of the demand slump from the freeze), has steepened the global ethylene cost curve meaningfully in favor of US ethane-based production – see Image Above). This would normally allow the US to push exports around the World, but given current product shortages, there is no need to push anything anywhere. The sustained lower ratios through most of 2020 was supportive of incremental basic chemical investment in capacity in Asia and we have seen plenty of announcements over the last 6-9 months. If current differentials are maintained we may see incremental interest in new US capacity. In the meantime, this swing is likely a relief for Total/Borealis as it suggests that the venture should be able to find a home for the ethylene surplus that will exist at the JV for the next 12 months or so.
