The approaching 2019 will be the most significant year ever for the U.S. liquefied natural gas export business
Next year really is: “the beginning of the boom.”
The U.S. is poised to triple export capacity to around 10 Bcf/d by the end of next year, and we could be on our way to be the world’s largest exporter before 2025. And in a “second wave” of activity, federal regulators will decide the fate of an additional 13 pending projects by the end of 2019.
For an industry that just started in February 2016, U.S. LNG has quickly been extending to all corners of the globe. Yet, neighbor and friend Mexico has received 20% of all U.S. LNG exports, with South Korea second at 19%. At some point though, Mexico’s primary position will slide because the country wants to produce more of its own gas and build more pipelines to gain greater access to cheaper U.S. piped gas. For example, piped U.S. supply to Mexico has averaged $3.18 per MMBtu so far this year, compared to $4.59 for U.S. LNG to Mexico.
Even though China’s 10% tariff on U.S. LNG has led to the delay of at least one major export project in Louisiana, our shipments globally will continue to flourish.
Other importers are looking at more U.S. LNG to appease President Trump in ongoing trade talks, not to mention desperately seeking our flexible contracts.
In Europe, for instance, the goal is for U.S. LNG to buffer Russian piped gas, upgrading Europe’s energy security with more energy supply diversity.
Russia admits there is room for the U.S.: Russia’s Gazprom energy giant does not seek to cover all Europe’s gas needs.
Earlier this month, Polish state-run PGNiG signed a long-term deal with Cheniere for LNG supplies from the U.S. Russia supplies more than half of Poland’s gas demand but long-term contracts are expiring 2022. Critically, PGNiG reports that the price Poland pays for U.S. gas is 20-30% lower than for Russian supply, a global game-changer if such a competitive advantage can be maintained.
Germany too is looking to build its first LNG import facility to potentially access more U.S. gas. Playing both sides, Germany has been working with Russia to construct the controversial Nord Stream 2 gas pipeline earlier this year while also pledging to support for domestic LNG import facilities.
Ultimately, one or more U.S. West Coast LNG export facilities would be of tremendous help. These sites would be much closer to Asia than our current mushrooming plans that sit along the Gulf Coast, thereby lowering transport costs for us. An LNG export facility on the Pacific Coast eliminates both the fees and potential constraints that come with transiting the Panama Canal. The Panama Canal has been setting records for LNG traffic, with even more coming to make tolls much higher.
In truth, however, the biggest problem for a West Coast LNG terminal is stringent environmental laws across the region and access to gas. The seven EIA-tracked U.S. shale plays sit distantly to the east, and building pipelines moving gas to the west is anything but a simple process.
Indeed, there are a variety of uncertainties for the U.S. LNG export business, including China’s domestic gas production and pipeline imports of gas, the depth of the commitment for China and India to buy foreign LNG over cheaper domestic coal to cut greenhouse gas emissions, and expanding nuclear programs such as Japan’s restart of facilities after the 2011 Fukushima accident.
Baker & O’Brien document the good news for U.S gas to Asia. Since U.S. competition is mostly linked to the price of oil, lower U.S. Henry Hub gas prices and higher Brent oil prices, the international crude benchmark, greatly bolster our cause (Figure).
The coming year, however, could offer a challenging start for U.S. LNG. A lack of tankers amid rising demand is surging freight costs for U.S. LNG exporters. And for the rapidly approaching winter, an apparent warming trend of El Niño in Asia could lower needs for U.S. LNG this coming winter. Not to mentioned that oil-linked gas from other sellers has been plummeting along with oil prices. Brent crude prices are down some 25% since recent highs – not good news for U.S. LNG.
Our prospects are obviously bright for the long-term. EIA projects that U.S. gas production will grow at nearly twice the rate of U.S. demand, leaving a huge surplus available for exportation. We could up domestic output by 60 Bcf/d over the next 20 years, a 70% gain from today. We will be looking East: Asia LNG demand is expected to rise 70% by 2030.
Our chance to gain customers will be a constant process: since 2008, the average LNG contract term globally has dropped from almost 20 years to less than five.
Global gas demand will continue to soar, perhaps surpassing oil to become the world’s main fuel within 10 years