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Liubov Georges

Liubov Georges

Liubov Georges has graduated NYU with Master's Degree in Energy Policy and Economics. Currently, she is an energy analyst at DTN Oil&Gas

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Is The U.S. Set To Become An LNG Powerhouse

LNG vessel

US LNG in Global Market: Exciting Opportunities and High Risks

The LNG industry has been turned on its head by forces that could not been foreseen just few years ago. Continuous drop in demand for gas in Asian markets (down by 2 percent in 2015), excess supply from Australia and the United States, new pricing and a contractual framework have fundamentally changed the long-established LNG business model. Yet, in 2015 LNG global trade reached 250 million tonnes per annum (MTPA), making it a market worth more than $120 billion. Natural gas trade grew at 2.6 percent annually between 2000 and 2015, reflecting the overall trend of rising global demand for lower carbon energy. Today, these contradictions make the LNG business both unpredictable and full of uncertainties. A key question is how does U.S. LNG fit into this new global market? EIA forecasts that American producers will play a larger role in global LNG trade with U.S. export capacity set to rise 14 percent by 2020. However, since the market has fundamentally changed it is imperative to identify the risks and opportunities for U.S. LNG today.

An unprecedented 150 mpta of LNG export capacity will come online between 2015-2020 and 64 mtpa of it will originate in the United States. There are currently five new LNG projects under construction on the Atlantic and Gulf Coast: Sabine Pass (22.5 mtpa), Freeport LNG (13.2 mtpa), Dominion Cove Point LNG (5.75 mtpa), Cameron LNG (13.5 mtpa), Corpus Christi LNG (9 mtpa). The major concern for all of these projects finding buyers for these volumes. Even before demand from mature Asian markets had stumbled at 1.5 percent, EIA forecasted widely different scenarios for global LNG demand. (Graph 1)

(Click to enlarge)

Source: EIA Related: This Is What It Will Take To Seal The OPEC Deal

Yet, even those scenarios did not forecast a sharp decline in gas consumption from Asia-Pacific, a region that was considered a bottomless premium LNG market. Current government policies in Japan, Korea and Taiwan (JKT) favor, to varying degrees, nuclear generation, price competitive coal and renewables with large investments in power efficiencies. As a result of these policies it became increasingly difficult for utilities in JKT to contract large LNG volumes, as they simply cannot forecast their 5-10 year outlook on gas demand. Even though Asia still remains the largest LNG importing region, American producers should pay close attention to energy policies on nuclear, coal and renewables in the Asia- Pacific region, as they will be instrumental in shaping global natural gas demand. Another lucrative natural gas market – Europe - has been flooded with cheap Russian gas in what looks like an effort to maintain market share. In 2015, Gazprom delivered record volumes of gas to Europe, 158.56 bcm, which is an 8 percent increase from the 146.6 bcd in 2014. It was expected that the United States would export as much as 100 bcm/year of LNG to Europe, which would be enough to supply 1/4 of European gas demand. Yet, since U.S. LNG exports began at the end of February, only two cargoes with American gas have reached the shores of the European Union. Whether Europe plays a balancing role for U.S. LNG or becomes a market of last resort remains to be seen.

Despite demand uncertainties, new LNG producers are moving forward with projects worldwide. In 2017 alone, six new liquefaction plants will be brought online in Australia, Russia and the United States. In fact, if all proposed projects move forward, this will easily quadruple global LNG trade. These volume additions are simply unprecedented. It is estimated that the current LNG market is already oversupplied by approximate 60 mmtpa, which has put severe pressure on prices.

New Proposed LNG Projects Worldwide

(Click to enlarge)

The period of high oil and prices was instrumental in driving investors into this capital-intensive commodity business. It was a lucrative price spread between Asian spot prices and Henry Hub that precipitated the booming LNG industry in the United States. However, in 2015 gas prices abnormally converged across regions and today all LNG producers are forced to operate on a razor thin margin. No one could have forecasted that Asian LNG spot prices would collapsed by 10$/ mmbtu from 15$/mmbtu in 2014 to $4-$5/ mmbtu in 2016. (Graph 2) Related: Iran Surprises OPEC With A Further 250,000 Bpd Increase

Despite difficult demand and price environment, U.S. LNG still could benefit from the shaken up global market. In comparison with other international greenfield projects, majority of U.S. projects already have existing capacity with LNG being sold based on HH indexation and flexible contracts. This flexibility has already attracted European and Asian buyers that look for alternative suppliers for their portfolios. KOGAS, GAIL, Osaka Gas, Chubu Electric. Mitsui, EDF, Centrica among others, have contracted U.S. LNG without long term contract and no destination restrictions. Yet, the most promising markets for U.S. LNG will not be Asia-Pacific or Europe, but emerging centers for gas demand. Latin America, Middle East, India and Pakistan have substantial potential for additional LNG imports. Energy demand, and in particular power demand, is exponentially growing in these countries; however pipeline gas is in many cases politically or geographically unacceptable. For instance, the 2030 EIA forecast predicts that Latin America will need 37-103 bcm of additional LNG. It is no coincidence that out of 26 cargoes that have been delivered from Cheniere’s Sabine Pass, 19 went to South America. Chile is the single biggest recipient and absorbed 28 percent of the total U.S. LNG volume as of October 2016.

(Click to enlarge)

Source: EIA


So, what role could U.S. LNG play in the global market? Without a doubt, low oil and gas prices, combined with anemic demand for LNG in Asia have undermined the commercial prospects for many of the U.S. projects. As new volumes come into the market in 2017, U.S. LNG will face the same set of challenges as their counterparts in Australia and Russia. Yet, only U.S. producers offer such a degree of price and contract flexibility combined with reliable partnership.

American producers have the ingenuity and quick thinking that is needed to win over this challenging market. Another piece of U.S. LNG success will be the government’s role in reversing excessive regulations. If newly elected U.S. government acts in a timely manner to speed federal permitting process and improve tax and regulatory framework for gas industry, it would allow U.S. LNG to compete freely in international markets. Proposed LNG projects can also yield tremendous national benefits: economic, geopolitical and environmental among others. Government support could definitely place American producers ahead in global LNG export race. The day when the United States becomes a major LNG powerhouse could be just around the corner.

By Liubov Georges for Oilprice.com

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