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Colin Chilcoat

Colin Chilcoat

Colin Chilcoat is a specialist in Eurasian energy affairs and political institutions currently living and writing in the former oil capital of the world. Colin…

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LNG Export Hopes Fading Fast For US

LNG Export Hopes Fading Fast For US

The advent of liquefied natural gas (LNG) has revolutionized the way the commodity is transported and has brought increased parity to traditional pipeline relationships. In that regard, the United States’ natural gas boom was right on time. However, somewhat slow to react to market demand, the US may just be missing its window.

Since 2000, global LNG demand has risen by an estimated 7.6 percent per year. Nowhere is this increase in demand more apparent than in Asia, which comprises two-thirds of the global LNG market. Japan and South Korea account for roughly half of that, but less mature markets in China, India, and Taiwan have seen their imports grow an average of 16 percent per year since 2009.

Demand is only going up and by 2019 the LNG market is expected to expand by one-third. More generally, natural gas is expected to occupy an ever-larger share of the global energy mix – 25 percent by 2035. So where’s the problem? On the supply side, where growth is outpacing demand by leaps and bounds.

Related: Why US Shale May Fizzle Rather Than Boom

Today, the LNG trade represents approximately 10 percent, or 322 billion cubic meters (bcm), of global gas demand. However, current liquefaction capacity sits at 406 bcm, which translates to a utilization rate of only 79 percent. Toward 2019, this capacity is expected to more than double. Approximately 80 percent of future capacity will be sourced from Australia, Canada, East Africa, Russia, and the United States. In the early goings, the field – namely Australia – has the jump on North America.

With the final investment decision (FID) already in place for seven new LNG projects, Australia is set to become the world’s largest LNG exporter by 2018. The impending volumes – approximately 80 bcm – are already contracted at 91 percent under long-term contracts. Expansion and greenfield schemes could bring the country’s export capacity to more than 200 bcm by 2020.

In Africa, low domestic demand has helped spur LNG growth and the continent’s liquefaction capacity now comprises a quarter of the world total. Huge offshore finds in Mozambique and Tanzania have already caught the eye of Indian investors, who look to take advantage of the relative geographic convenience. In 2028, the continent is set to overtake the Middle East as the largest net LNG exporter.

Russia, while also slow to react, cannot be counted out. President Vladimir Putin has sought to aggressively expand his country’s Asian market share following the conflict in Ukraine. While profitability is certainly is a concern, the government has demonstrated a willingness to push through prestige projects. The upcoming Power of Siberia pipeline will dampen LNG growth in China moving forward. The country is also working closely with India on nuclear and LNG cooperation.

Back to the United States, a long regulatory process and a historical preference to keep hydrocarbons at home have delayed efforts to export LNG. Moreover, the relatively useless LNG import facilities, constructed pre-shale boom, serve as a reminder of how quickly fortunes can change.

Currently, the US re-exports approximately 1.5 bcm of LNG overseas, but has not shipped domestic LNG abroad since 2011. That should change in 2015, when the Sabine Pass liquefaction facility comes online. The project will export up to 26 bcm per year to free trade and non-free trade agreement partners. Beyond that however, the Federal Energy Regulatory Commission (FERC) and Department of Energy (DOE) have been stingy with their approval.

Related: Is The Canadian LNG Export Dream Dead?

A total of four LNG projects, with a projected capacity of 70 bcm, await approval by FERC or DOE. Once approved, FID must be made – Cameron LNG seems to be a good second bet – and volumes contracted. US preliminary volumes have contracted well – LNG importers like diversity – but the Energy Information Administration (EIA) has taken an increasingly pessimistic view of potential US exports.

US LNG exports according to the EIA

US LNG exports according to the EIA

Source: IEA

Pricing schemes vary, but Henry Hub-linked contracts – the US standard – has lost its shine as an alternative to oil-linked contracts. Oil’s collapse has more than halved Henry Hub’s price advantage over oil-linked supplies from Qatar and elsewhere. The International Energy Agency estimates that oil prices of $70 to $75 per barrel translate to a pricing advantage of only 50 cents.

So to recap: we’re looking at an already saturated market with little opportunity to make a buck. Sabine Pass and likely Cameron will have their chance, but the window is all but closed.

By Colin Chilcoat of Oilprice.com

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  • Tina on December 17 2014 said:
    I am always intrigued that investors are throwing their money at these LNG-export Ponzi schemes. Don't they read the articles about the the shale bubble and stranded assets?
  • Doug Vollman on December 17 2014 said:
    One inaccuracy. Alaska is exporting LNG out of Cook Inlet.
  • Colin Chilcoat on December 17 2014 said:
    Doug,

    You're correct; I should've specified that first shipments to non-FTA countries are due in 2015. Still, the Kenai volumes to date are just a fraction of 1 bcm.

    http://energy.gov/sites/prod/files/2014/12/f19/oct14lng.pdf
  • Brad Bloomer on December 17 2014 said:
    Where on earth did you come up with this statement:
    "Currently, the US re-exports approximately 1.5 bcm of LNG overseas, but has not shipped domestic LNG abroad since 2011."

    How could the US have exported domestically-produced LNG (in 2011, or anytime in the past) if it did not have any liquefaction plants?
  • Colin Chilcoat on December 17 2014 said:
    Brad,

    Liquefaction facilities are not necessary for the re-exports - volumes purchased by the US are just directed elsewhere. The re-exports are not domestically produced volumes of natural gas.

    http://www.eia.gov/dnav/ng/ng_move_expc_s1_a.htm
  • Mark Pilcher on December 17 2014 said:
    Four new US LNG export projects are already under construction. In addition to Sabine Pass (Trains 1 - 4), Cameron, Freeport and Cove Point have already started construction. These represent about 60 million tonnes per annum of capacity (25% of the existing trade). Jordan Cove has been approved by the DOE, subject to FERC approval. Corpus Christi is close to receiving its final FERC approval, and Lake Charles are well advanced. The implication that US projects are progressing slowly, or that Canadian projects are ahead, is way off base. Although it is easy to get NEB approval for projects in Canada, there is not a single large LNG project in Canada that has made an FID.
  • Colin Chilcoat on December 17 2014 said:
    Mark,

    Projects haven't necessarily progressed slowly, but the US got a late jump in general. Full operation will come no earlier than 2019, when demand is still projected to lag behind. It's my opinion that their window to affect the lng market/make a big profit is closing.
  • Carin Zelenko on December 18 2014 said:
    No mention of TX? What's your view on the Freeport LNG project and how it will fare in light of recent trends?
  • Mark L. Pilcher on December 18 2014 said:
    I don't know what you mean by "affect the LNG market/make a big profit". The introduction of US LNG in a quantity representing 25 percent of the market, with Henry Hub indexation and destination flexibility, will have a huge "effect" on the market. Buyers of US LNG represent the "who's who" of the industry. The export facilities are tolling facilities, earning basically utility returns. Additional profits will come from index arbitrage and trading options arising from the flexibility provided by the U.S. LNG supplies. This window is opening, not closing.
  • Colin Chilcoat on December 19 2014 said:
    Mark,

    It's a buyer's market, and those buyers like to diversify so sure the US will have a market share. But, Henry Hub indexation offers little to no advantage to more traditional oil-indexation when prices remain low. In a more geopolitical sense, the US will not be able to use LNG as a significant tool for its foreign policy.
  • jeff jones on December 30 2014 said:
    If buyer's appreciate diversity then the good times will get even better. Efficiency in the use of energy
    has a constant pressure to increase, combined with an
    expanding pool of sources of energy will add up to even
    happier buyer's.
    Germany is a good example of the progress that can be made when focus of intention is achieved. y Wind power and even solar power have in a fairly short time significantly reduced German reliance on dirty sources of energy.
    As is often the case whathappens in Germany will soon be adopted by the less functional capitalist market places.

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