The 2014 FIFA World Cup: A Catalyst to LNG Prices - Analyst Blog

Can you imagine the chaos if Brazil were to reach the World Cup finals and the lights suddenly go out in São Paulo and Rio de Janeiro? The TV screen turns black, the lights at the stadium goes off and one can hear the fans sigh with collective dismay.  

The soccer loving Latin American nation is doing everything possible to ensure that such a nightmarish situation doesn't happen and it is not embarrassed on the world stage.

And for that Brazil has turned to another energy source - liquefied natural gas, or LNG.

The Problem: Drought-induced Power Shortage in Brazil

Brazil's leading source of electricity is hydropower, which typically meets around 75-80% of the total demand. However, the country has been hit by a severe drought – the worst in decades – which reduced water supply in certain regions to near-critical levels. Indeed, the record drought caused the rain-dependent hydro-reservoirs at many plants to dry out, jeopardizing the South American country's leading source of electricity. In fact, at the heart of the drought in February, a blackout left six million people in the dark for up to two hours.

The government fears that it could happen again during the FIFA World Cup 2014, the world's most-watched sporting event, which is being held in Brazil for the first time since 1950. This sent the country scrambling for an additional fuel source to compensate for the lack of hydropower. Sensing the seriousness of the situation, the government instructed the power distributors to switch to gas-fired plants.   

The Solution: LNG Imports at High Cost

Brazil's state-run energy giant Petroleo Brasileiro S.A., or Petrobras PBR has been buying record amounts of LNG in the spot market so far in 2014 to run gas-fired power plants at full capacity. The country, which started importing LNG only in 2009, bought 4.2 million metric tons (mmt) of the fuel last year, up 54% from 2012. But this year, the figure is expected to be significantly higher. Petrobras – the only Brazilian importer of LNG and the second largest in South America behind YPF SA YPF – is likely to purchase 21 million cubic meters a day (around 5.7 mmt annually) of LNG in 2014.

The Result: LNG Prices Rise

Importantly, Brazil and Petrobras are not at all concerned about the price they pay for the imported LNG, so as to keep lights on during the soccer extravaganza and avoid a catastrophic situation.

Petrobras is buying LNG at about $18–$19 per million Btu (MMBtu), near what Asian importers are paying. Typically, higher shipping costs to Asia mandates a steep price for LNG in the region, at around $19–20 per MMBtu.

The Bottom Line

Spot LNG that is normally shipped to Asia by sea from the Atlantic basin, has been snapped up by Brazil since the last few months. In fact, Brazil's eagerness to import LNG at any cost has seen the narrowing of the Latin America discount to those in Asia. As Brazil accelerates the pace of imports and southern hemisphere winter approaches, cost of LNG in South America may even surpass those in Asia over the next few months. Moreover, with Brazil also hosting the 2016 Summer Olympics in Rio de Janeiro, it is likely to pull more LNG to its own shores to make sure that the mega sports event is not affected by power cuts.

Companies to Benefit

The resultant increase in LNG prices bodes well for exporters and terminal builders, with more expected to get in on the game. Let's look at some companies that are likely to benefit from the growth and development of the LNG markets.

Houston, Texas-based Cheniere Energy Inc. LNG is the first name that comes to mind. The only Federal Energy Regulatory Commission/FERC -approved operator in this space with the 2.6 billion cubic feet per day Sabine Pass terminal in Cameron Parish, Louisiana, this Zacks Rank #2 (Buy) company has got the first mover advantage. Cheniere is expected to witness earnings growth of 21% in 2014.

While Cheniere Energy is clearly ahead of the pack when it comes to natural gas export, there are certain other players that are in line to get federal approval for their terminals. These include Dominion Resources Inc's D Cove Point facility in Maryland, Sempra Energy's SRE Cameron terminal in Louisiana and Energy Transfer Equity L.P. ETE/BG Group Plc's Lake Charles facility, also in Louisiana.

As natural gas production in the U.S. soars, domestic prices remain constrained, and the Obama administration speeds up LNG approvals, more and more companies will be eyeing international markets (including Brazil) through lucrative export opportunity.