The U.S. is in a relatively strong position to take advantage of Asian demand for natural gas. There are now a total of three proposed export terminals for liquefied natural gas (LNG) in the U.S. that have achieved all the necessary permits.
With full federal approval, political risk for LNG exports can be laid to rest. Now, the bigger challenge for LNG exporters is finding and securing a captive market for their product. In this regard, there is a lot to be excited about as well.
But investing in U.S. LNG exporters is not without risks. For one, a rapid rise in demand for LNG in Asia is suddenly looking a bit less of a sure thing. That is largely due to China’s flagging growth rate.
More importantly, American producers will face stiff competition from their Australian counterparts. A massive volume of liquefaction capacity is set to come online over the next several years. Australia is bringing online 62 million tonnes per year (mtpa) of LNG export capacity by 2018, which is a staggering figure considering the country only has 22.2 mtpa today. And they are much closer to the markets of China, Japan, and South Korea.
That proximity lowers shipping costs, which may seem nominal considering the cost of production, liquefaction and regasification. But lower shipping costs could be just enough to make the difference in winning long-term contracts. Australia, therefore, is sitting in the best possible spot to serve the hungry consumers in East Asia.
The equation could be upended, however, due to one massive infrastructure project: the expansion of the Panama Canal.
The Panama Canal just passed its centennial, having been inaugurated in August 1914. For 100 years the canal has allowed shorter shipping times between Atlantic and Pacific nations. But the canal is vastly outdated as it cannot handle modern super tankers. Its system of locks and passages are too small and too narrow for the ships that carry enormous loads of crude oil or LNG. For that reason, the Panama Canal is currently not a major thoroughfare for energy.
That is set to change with the historic expansion of the canal. Through an international consortium, Panama is building an additional set of locks that can handle much larger vessels.
As it stands, only ships with the capacity to carry 400,000 to 550,000 barrels of oil can pass through the canal. Known as “Panamax,” these ships of 80,000 deadweight tons (dwt) tend to be on the smaller end of oil tankers used in global trade. The expansion will lift the upper limit of ship sizes to 120,000 dwt, with the ability to carry 680,000 barrels of crude (see chart).
When completed, an estimated 80 percent of the global LNG shipping fleet will be able to pass through those narrow waters. Currently, the canal cannot handle any LNG ships.
The big question is when it will be finished. Having initially been approved over seven years ago, the project is now wildly over budget and behind schedule. The original price tag was just $5.2 billion, but that may balloon to $7 billion when all is said and done. The project suffered from a halt in construction in early 2014 over whether or not the consortium building the expansion would be reimbursed for the higher costs. The canal was expected to open in October 2014, but the start date has slipped to the end of next year or the beginning of 2016.
Despite the setbacks the canal expansion could alter patterns of trade for LNG. Only Trinidad and Peru have liquefaction facilities in the Americas, the latter of which would not need the Panama Canal to reach Asia. The completion of the canal will coincide with the commencement of operations for some of the first major LNG export terminals on the U.S. Gulf Coast. When U.S. liquefaction facilities come online, they will discover that there will be a shorter route to Asia.
This could provide larger opportunities for American LNG suppliers as they compete in the global marketplace. Cheniere Energy (NYSE: LNG) hopes to be the first supplier in the U.S. to begin operation. At its Sabine Pass facility in Louisiana, already equipped to handle incoming LNG, Cheniere plans on adding two liquefaction trains by the end of 2015, with two more to be built in the 2016-2017 timeframe. Each train will be able to export 4.5 mtpa. Cheniere already has a contract in hand with Korea Gas, which plans on purchasing 3.5 mtpa for 20 years beginning in 2017. A similar contract was agreed to with Gail India, with deliveries set to begin in 2016.
The Panama Canal expansion will allow Cheniere to cut costs for its deliveries. According to the Panama Canal Authority, travel times for Cheniere from the Gulf Coast to East Asia could be cut from 63.6 days down to 43.4 days, reducing costs by 24%.
Another big winner is the Cameron LNG facility. It received final approval from the U.S. Department of Energy in early September 2014, greenlighting construction. The $10 billion facility is owned by Sempra Energy (NYSE: SRE), which has a 50.2% stake. Three other companies each own a 16.6% stake in the LNG export project: GDF Suez (EPA: GSZ); Mitsubishi Corporation (TYO: 8058); and Mitsui and Co. Ltd. (TYO: 8031).
Mitsui’s role is an interesting one. It holds upstream assets in the U.S., with shale gas holdings in the Marcellus and Eagle Ford Shales. It will pay the Cameron LNG facility a “tolling” agreement – essentially a fee to liquefy its gas and transport it. Mitsui contracted out tolling capacity for 4 mtpa for 20 years. Mitsui also has its 16.6% stake in Cameron LNG. All of this provides a level of stability for the project – it has a certain amount of upstream supply guaranteed, as well as steady toll fees that aren’t subject to price volatility.
The Panama Canal will reduce costs for this project as well.
Another set of winners will be the shipping owners. With shipments from the U.S. to Asia set to increase, there are a few companies that stand to gain. Teekay LNG (NYSE: TGP), which is the third largest owner of LNG ships, is banking on increased marine traffic to boost its bottom line. It has booked five-year contracts for two of its ships to carry U.S. LNG.
Golar LNG (NASDAQ: GLNG), another LNG shipper that is eyeing rapid growth over the next few years. It has 13 ships under its management right now, but it is building more as quickly as it can in order to take advantage of rising demand for marine vessels. Golar is also building floating LNG liquefaction vessels. The ships will be able to liquefy natural gas at offshore fields, and ship directly from there. Golar is building 10 units over the next five years. In a vote of confidence, Bank of America upgraded Golar LNG’s stock to a “buy” rating because of strong demand for its services.
The LNG trade is in a holding pattern of sorts as a flurry of construction is still underway. But beginning in 2015, and definitely by early 2016, LNG trade will take off. The Panama Canal expansion will be completed just in time, and will play a key role in facilitating trade flows between the U.S. and Asia.