Freeport LNG plant explosion adds pressure on global supply

HOUSTON, June 9 (Reuters) – Freeport LNG, operator of one of the largest U.S. liquefied natural gas (LNG) export plants, will shut down for at least three weeks following an explosion at its plant in Gulf Coast of Texas, increasing the risk of shortages especially in Europe.

Freeport LNG, which provides about 20% of LNG processing in the United States, announced the shutdown late Wednesday after assessing damage to the massive facility.

U.S. natural gas markets fell as traders anticipated the outage would reduce domestic demand.

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The market impact spread on Thursday to push European gas prices up a fifth, with traders fearing lost U.S. shipments could strain a market already struggling with tight Russian supplies.

European buyers have shunned Russian LNG because of its invasion of Ukraine – actions Moscow calls a “special military operation” – and surging demand in China has added to the pressure, analysts said.

“This is a significant production outage at a major US facility,” said Alex Munton, director of global gas and LNG at research firm Rapidan Energy. Freeport LNG ships about four cargoes a week and a three-week shutdown will remove at least 1 million tonnes of LNG from the market, he said.

“That will mean one thing: shortages. Competition for spot LNG will drive up global LNG prices,” Munton said.

In Europe, the benchmark first-month gas contract at TTF’s Dutch hub rose 12.6% to 88.70 euros per megawatt hour (MWh) in morning trading. British gas prices also jumped, with the day-ahead contract gaining 22.1% to 105 pence per therm. Prices calmed down later in the session, rising between 5% and 11%.

Traders said it was difficult to assess the impact on JKM prices – which are widely used as a benchmark for Asian LNG as it depends on the extent of the damage and how much of the plant would return on line.

JKM prices hovered around $22.5 per million metric British thermal units (mmBtu). It remains at a discount of about $3/mmBtu from European TTF ag prices.

DESTINATION EUROPE

The Freeport plant can process up to 2.1 billion cubic feet of natural gas per day (bcfd) and, at full capacity, can export 15 million tonnes per annum (MTPA) of liquid gas. US LNG exports reached a record 9.7 billion cubic feet per day last year, according to the US Energy Information Administration (EIA).

Analysts at data intelligence firm ICIS said in a tweet that 68% of Freeport LNG’s exports over the past three months were destined for the European Union and Britain.

A European gas trader speaking on condition of anonymity said the gas could be seen as “diverted” if the outage is short-term, but in the longer term it would strain an already tight market and has raised the question of whether Europe could wean itself off Russian gas.

In March, 21 cargoes were loaded at the Freeport facility, transporting about 64 billion cubic feet of gas to destinations in Europe, South Korea and China, according to the US Department of Energy. This is an increase of 15 cargoes in February and 19 in January.

U.S. natural gas futures fell on Wednesday on fears the blast could disrupt gas demand from the plant. They were down around 6% at $8.699 per million British thermal units (mmBtu), after hitting a nearly 14-year high of $9.664 mmBtu earlier in the day.

Freeport LNG was founded in 2002 by billionaire Michael Smith and processes gas for companies including BP (BP.L), JERA, Kansai Electric (9503.T), Osaka Gas (9532.T), SK E&S and TotalEnergies . It is in the process of expanding the capacity of the plant to 20 MTPA.

An investigation into the blast has begun, a company spokesperson said, without giving details about the cause of the fire.

A U.S. Coast Guard official said Wednesday that a safety zone had been established two miles east and west of the Freeport LNG facility, closing that part of the intra-coastal waterway to the maritime traffic.

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Reporting by Liz Hampton in Denver, Sabrina Valle in Houston and Scott DiSavino in New York, Mawra Rashad in London and Nora Bulin in Oslo; Editing by Marguerita Choy, Richard Pullin, Chris Reese, Kenneth Maxwell and Barbara Lewis

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