As Cheniere Energy shuts down its LNG terminal at Sabine Pass for a month of repairs, it seems like a good time to take stock of the global LNG situation. With pundits and politicians increasingly pointing to LNG as proof of a new golden age in American energy production, it’s necessary to measure how those predictions may pan out.
Since coming on-line in February, Cheniere’s facility at Sabine Pass has shipped 33 cargoes of LNG. In the first six months of 2016 total LNG exports totaled 63.5 billion cubic feet (bcf) against total U.S. imports of 53.1 bcf, according to Argus Media. An analysis found that those shipments ended up in diverse markets world-wide, with the conspicuous absence of East Asia, where the bulk of LNG demand is situated.
The U.S. won’t easily find markets in Japan, China or South Korea (not to mention India, where LNG demand will grow faster than elsewhere), due primarily to strong competition. Australia has seven operating LNG developments and three more currently under construction. While the U.S. is expected to produce nearly 10 bcf per day by 2020, Australia’s new projects could increase its liquefaction capacity to 13 bcf per day by 2020. It’s closer to potential markets and its producers have a head-start on American competition.
With competition from Australia, now the world’s leading LNG exporter, and Qatar driving down spot prices in Asian markets relative to the Henry Hub, Latin America and South America represent the most attractive market for the moment. Seventeen out of the thirty-three LNG shipments from Sabine Pass have arrived in South American ports, according to Bloomberg. Chile represents an attractive market now that the Panama Canal can accommodate LNG tankers, while Argentina spot prices remain high as the country tries to pivot towards renewable energy. The spot price for Argentina in August averaged $5.79, in Brazil $5.81. Prices in East Asia were comparable while Western European prices stayed depressed. Generally global LNG prices are seriously depressed from highs of $17 and $20 in 2013 and 2104.
Expectations from LNG producers are measured according to these market conditions. While South America represents a current market, long-term prospects there aren’t hugely attractive. While East Asia is currently the center of LNG demand, consumption in Japan and South Korea is expected to slow as gas continues to compete with coal and nuclear power, while that of China is uncertain and could potentially be fed by domestic production. India represents a bright spot, but one that Australia, along with traditional exporters like Qatar and Iran, seem much better placed to supply.
The U.S. and Australia are not alone: LNG projects are being proposed in Canada, with Petronas recently approved to construct an LNG terminal in British Columbia, though while some two dozen such projects have been proposed, construction has not yet begun. Given current market conditions, Petronas has indicated that it is unsure about the project, which could cost in excess of $US27 billion.
Viewed from this angle, it would seem that LNG is facing a perfect storm of low prices, stagnant demand and global over-supply. Industry insiders don’t necessarily see it that way, however, with some arguing that despite current low prices, future demand has been under-estimated. The projected demand from energy conversion (where power plants and engines are converted from coal/gasoline burning to LNG) would dramatically increase demand for LNG, which thanks to the increased liquefaction and transportation capacity currently under construction, would be well positioned to meet such demand.
A recent book from the Oxford Institute for Energy Studies predicts a “great re-configuration,” where the 180 billion cubic meters currently under development is absorbed through a variety of means and further pressure is placed on the pricing mechanism linking LNG to the Henry Hub price (plus costs). Currently LNG is sold under long-term contracts but that could change as prices continue to stay fluid.
One thing seems certain: prognosticators who predict a golden age for American LNG exports need to stay conscious of market conditions and the kinds of global competition American exporters would face.
By Gregory Brew for Oilprice.com
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