How The U.S. Could Transform Global Liquefied Natural Gas
In the years ahead, to me, there will be no more interesting energy market in the world than the
booming liquefied natural gas trade. Starting exports in February 2016, the U.S. will be an increasingly larger player in LNG, an export bonanza that's likely second to the shale production revolution as the most transformative development in the history of the U.S. natural gas market.
Natural gas is the
go-to source of energy to reduce greenhouse gas emissions and backup intermittent wind and solar. Now, I'm not saying any energy source is "bad" (all have their good attributes), but gas will be leaned on most heavily to meet new energy demand. This explains why the major oil companies are now
promoting themselves as major gas companies.
By the end of next year, the U.S. will have tripled its LNG export capacity to ~10 Bcf/d, or some 25% of the current global market. We are the emerging LNG supplier, as the U.S. demand markets of electricity, industry, and niche uses like transport will not satisfy
our production surge. A domestic surplus of gas makes exports the natural next step, and buyers increasingly covet the shorter and more flexible contracts that we offer. We are inserting liquidity to a longtime overly rigid system that limited new entrants.
In fact, we've already shipped to 30 destinations, and some model that we could eventually export over 20 Bcf/d of LNG within 15 years. That's about as much gas as our Marcellus shale play - the largest gas field in the world - yields in total.
Today, LNG accounts for about 12% of all global gas demand but it's the fastest growing way to trade gas. With 40 today, by 2022 there will be over 50 importing nations. After rising 10% last year, LNG demand is expected to jump another 9% this year, with so much more to come. It's an industry that now requires
a $200 billion infusion over the next 12 years.
With a rapidly maturing market, key players are building out their marketing and trading capability. As our own LNG exports take flight, the
U.S. Henry Hub (HH) gas price, formulated at the main distribution point in Louisiana that serves as the delivery location for gas futures traded on NYMEX, could become a global benchmark price. HH is the most traded gas futures contract in the global market.
And HH is desirable because the price point is based on the transparent fundamentals of supply and demand, with stable, affordable, and increasingly flexible contracts. This is in stark contrast to other gas sales that are based on the price of oil, a precarious oil-indexation that still accounts for 65% of global LNG. U.S. sellers would love to become a global price setter: "
How U.S. LNG may create new pricing fundamentals over the coming 5 years."
With so much U.S. LNG exports coming online, pioneer Cheniere energy
says that HH-based contracts could account for 30% of global LNG by 2025. This would be a positive for buyers by breaking the stranglehold of other more risky sellers.
The U.S. will have major competition of course, particularly from the gas exporting titans Russia, Qatar, and Australia but also from the
giant trading houses and even European LNG buyers looking to resell the U.S. cargoes that they've already bought. All are being bolstered by the
highest global LNG prices in four years - with even more bullish potential this winter.
But it's Canada that is now emerging as major competition as well. Just last week, after years of delay, the $31 LNG Canada project from
Shell and Asian partners was officially green-lighted to ship gas from British Columbia to Asia. The huge project is unique because it didn't first secure long-term off-take contracts, a practice that has become the norm.
LNG Canada will begin construction as soon as possible and could be online within five years. The Trump administration should know that projects on Canada's west coast are much closer to Asia, where 75% of current LNG demand resides. For example, it takes just over a week for a tanker to sail from Vancouver to Tokyo, compared to nearly three weeks for the U.S. Gulf Coast. We must continually be pro-active in this burgeoning business to compensate for such things.
The approval of LNG Canada shows how finally rising oil and gas prices indicate that "what's old is new again." While modular and nimble projects will remain increasingly popular, booming demand also signify that "
after $80-billion blowouts, mega oil and gas projects are back." Companies, however, would be well advised to enter this next phase of growth with a far better sense of "what could go wrong." "
Cost overruns near $50bn as Australia’s LNG boom falters."
Despite a worsening trade war with China that now has a 10% tariff on U.S. LNG, our prospects are still great. As oil prices rise, for instance, competitors that sell gas linked to oil will be offering less attractive terms. Oil is now at the highest prices in four years, and even "
$100 oil" has been trending up in "Google Trends." Due to a lack of investment in new supply capacity that came from the price collapse that started in 2014, an
oil price spike could come sooner than many realize.
Ultimately though, there's room for all gas exporting nations. A very large global LNG supply shortfall is expected to materialize within the
next five years, after years of new projects not getting approved. In fact, LNG Canada was the first big greenfield project approved in five years, even though demand has been up 33%.
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Although still having them very high, I believe EIA projections for U.S. LNG exports aren't high enough.Data source: EIA; JTC
www.forbes.com/sites/judeclemente/2018/10/12/how-the-u-s-could-transform-global-liquefied-natural-gas/#3d35f9e92b96
