The 60-year liquefied natural gas industry has a new hierarchy in place, and it's opening up new trading opportunities. For the first time ever, the United States has become the world's largest LNG exporter, establishing itself as a bona fide natural gas superpower.
From a position of relative obscurity just five years ago, the U.S. LNG sector has rapidly risen through the ranks to challenge the heavyweights. U.S. liquefied natural gas (LNG) export capacity has expanded rapidly since the Lower 48 states first began exporting LNG in 2016. In 2020, the United States became the world's third-largest LNG exporter, behind Australia and Qatar.
And now, the United States has become the world's biggest liquefied natural gas (LNG) exporter as deliveries surged to energy-starved Europe. According to ship-tracking data compiled by Bloomberg, output from American facilities edged above Qatar in December after a jump in exports from the Sabine Pass and Freeport facilities, with LNG giant, Cheniere Energy Inc. (NYSE: LNG), saying last month that a new production unit at its Sabine Pass plant in Louisiana produced its first cargo.
In the same vein, China has become the world's biggest LNG importer, managing to overtake Japan for the first time since the latter pioneered the industry in the 1970s.
Interestingly, the two seismic events are being blamed for the massive spike in volatility in the natural gas markets. Gas markets have become highly volatile, trading up and down on single days in ranges they barely covered over decades. For instance, European natural gas prices, often used as a benchmark for LNG, hit a record high of 180 euros per megawatt-hour in mid-December before crashing more than 60% over a 10-day span.
According to Bloomberg, the new LNG superpowers are not nearly as predictable as their predecessors leading to uncertainties in the markets. For starters, reliable data from China is hard to come by. China's enormous weight within the market allows it to more easily influence spot rates or long-term pricing norms.
As a result, LNG prices have seen wild swings as it's become a widely traded commodity, similar to crude oil. Trading desks have proliferated globally, with Wall Street banks like Macquarie Group and Citigroup Inc. hiring traders to cash in on the volatility while Japanese LNG giants like Jera Corp. and Tokyo Gas Co. have set up their own LNG trading houses.
In recent years, independent traders such as Vitol Group and Trafigura as well as in-house trading units of oil and gas giants such as Royal Dutch Shell Plc (NYSE:RDS.A), BP Plc (NYSE:BP), and TotalEnergies SE (NYSE:TTE) have posted record profits thanks to increased volatility in the oil and gas markets.
Source: Bloomberg
U.S. LNG Winning
Last month, European natural gas prices hit a new record high after a pipeline that brings Russian gas to Germany switched flows to the east while U.S. ships carrying liquefied natural gas (LNG) destined for the European market are diverting to Asia, where prices are even higher.
Westward gas flows through the 2,607-mile-long Yamal-Europe pipeline, one of the major routes for Russian gas to Europe, have been gradually falling since Saturday but have now reversed direction, a move the Kremlin says has no political implications.
Some western politicians contend that Russia is using its natural gas as a weapon in the political tussle tied to Ukraine, as well as delays in the certification of another controversial pipeline, Nord Stream 2. Russia, of course, has denied any connection.
"There is absolutely no connection (to Nord Stream 2), this is a purely commercial situation," Kremlin spokesman Dmitry Peskov told a conference call.
The litmus test of Gazprom's capacity to act as a swing supplier was its ability to drop production dramatically in 2020 and then to bring it back up again quickly in 2021. Yet, Gazprom has failed to bring any more spare production capacity online when needed most for one reason: it has none left.
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According to Vitaly Yermakov, expert with the Centre for Comprehensive European and International Studies, National Research University Higher School of Economics, Gazprom has really been "firing on all cylinders", pushing its gas output to maximum levels at all of its key fields for most of 2021 so far. In fact, there was no sharp cyclical decline in output over the summer months.
Yermakov points to several reasons why Gazprom has been unable to cover the call for increased gas production or to fully refill gas storage in Russia and in Europe. First off, very low gas prices in 2020 forced extremely high withdrawals of gas from storage by producers in a bid to minimize transportation costs and reduce losses. Second, the combined effects of robust gas demand, extreme weather patterns, and limited LNG availability in Europe have resulted in extreme market tightness and high prices. Gazprom has actually done well by managing to meet all its contractual obligations and increased deliveries to Europe, but could not single-handedly address Europe's energy insecurity.
The latest reverse flows have only added to bullish factors for the gas markets, but there's one big winner: the United States.
Although the U.S. LNG lead appears temporary at the moment, the country is set to become the world's undisputed leader in LNG exports once the new LNG liquefaction units, called trains, at Sabine Pass and Calcasieu Pass in Louisiana are placed in service by the end of the current year.
Global LNG demand has hit record highs each year since 2015, thanks in large part to surging demand in China and the rest of Asia. Much of that global appetite has been steadily met by rising U.S. LNG exports, which have reached new records every year since 2016, a trend that appears set to continue.
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Source: EIA
The U.S. Energy Information Administration (IEA) projects that U.S. LNG exports will hit 11.5 billion cubic feet per day (bcfd) in 2022, good for a 22% slice of the expected world LNG demand of 53.3 bcfd.
The U.S. expects to make key LNG export capacity additions next year:
- Train 6 at the Sabine Pass LNG export facility
Train 6 will add up to 0.76 billion cubic feet per day (Bcf/d) of peak export capacity. The terminal began producing LNG in late November, with the first export cargo from this train expected to be shipped before the end of 2021.
- Calcasieu Pass LNG
This new export facility has 18 liquefaction trains with a combined peak capacity of 12 million metric tons per annum (1.6 Bcf/d). Commissioning activities at Calcasieu Pass LNG started in November 2021, with the first LNG production expected before the end of this year.
All liquefaction trains are expected to be operational by the end of 2022.
By Alex Kimani for Oilprice.com
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And with Qatar adding 33 mt in a new capacity expansion by 2023/24 it will consolidate its position as the world’s largest producer and exporter of LNG and also the cheapest producer. Moreover, the US can’t maintain its current level of LNG exports for long because of rising domestic demand.
On the supply side, the gas supermajors are Qatar, the United States, Australia and Russia. On the demand side, China is now the world’s largest consumer of LNG having overtaken Japan in December 2021.
In 3-4 years an estimated 79 mt/y of additional LNG capacity will come online with 33 mt/y coming from Qatar, 30 mt/y from Russia and 16 mt/y from the US,
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London