Why Europe Will Prove Key To Future U.S. LNG Exports
U.S. and Canadian production provide a couple of great examples of the dynamics at play in the current crude market. Canadian oil-sands production has been holding up relatively well in the last year, mostly because investments are longer-term in nature and had already been made prior to the price drop. (And also in part due to a weaker Canadian Loonie helping to mitigate some of the losses on exported oil).
These companies are now, however, trying to slow output amid the ongoing lower oil price environment, while eighteen oil-sands projects have been shelved since the downturn. Meanwhile, although U.S. production is slowing at some shale plays, producers at basins such as the Permian continue to innovate, boosting efficiency gains to drive on lower costs.
The chart below illustrates the contrasting fortunes for Alberta versus Permian basin production. And just as 1000 DUCs (drilled but uncompleted wells) in the Bakken illustrate, U.S. shale production is able to be much more nimble should prices rise – exemplifying its new-found status of swing supplier.
Finally, the U.S. is set to reach a historical energy landmark early next year as LNG exports start at the Sabine Pass Terminal in the U.S. Gulf…. just as the global LNG market capitulates. Global supply is expected to increase by 90 million tons over the next three years, which equates to ~38 percent of global demand last year. The U.S. alone has 67 million tons of liquefaction capacity under construction, and this influx of supply is set to happen just as demand expectations are being ratcheted lower from key markets in Asia.
China is starting to divert LNG cargoes away from its shores, as an economic slowdown crimps demand, leaving an excess of contracted supply. As the chart below illustrates, this imbalance is expected to persist for the rest of the decade, meaning further volumes available on the global market.
This oversupply is set to have a far-reaching impact. New U.S. LNG export terminals are expected to only operate at half capacity due to ebbing demand, while some regions such as Europe are set to reap the benefit; half of the export volume from Sabine Pass is now expected to head to Europe.
By Matt Smith
LNG Price at posting:
$1.47 Sentiment: Buy Disclosure: Held
