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.
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.
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
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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