LNG Is Booming and Natural Gas Consumers Are Seeing The Effect
by Bob Shively, Enerdynamics President and Lead Facilitator
In the early 2000s, the U.S. seemed to be running out of low-cost natural gas. Conventional supplies were tight and there was a short rush to build liquefied natural gas (LNG) import terminals with the assumption that we must import gas supplies from Trinidad, Africa, and the Middle East to meet growing demand. Twelve import terminals were constructed with a total capacity of more than 17 Bcf/d. But a funny thing happened on the way to LNG import bliss: The domestic oil and gas industry figured out how to produce low-cost shale gas through hydraulic fracturing and horizontal drilling. Soon the import terminals sat idle; investors had spent billions of dollars for seemingly useless assets.
Fast forward a dozen years, and these assets have again become highly useful. But today they have been reconfigured as export terminals taking U.S. gas supplies to growing markets in Europe, Asia, the Caribbean, and Latin America. By the end of 2021, the U.S. had seven export facilities with about 12 Bcf/d of export capacity. This capacity was built by reconfiguring import regasification terminals to turn them into liquefaction export terminals. And more capacity is being added with a total of about 14 Bcf/d expected by the end of 2022. At this point the U.S. will have the largest LNG export capacity in the world.
At the same time, world demand for LNG has dramatically increased. Returning economic growth in Asia following Covid shutdowns, growth of gas-fired electric generation, and the continuing crisis in Ukraine resulting in significant reductions in Russian gas deliveries to Europe have traders around the world searching for available LNG supplies. In the meantime, gas prices have skyrocketed making producers and traders eager to move as much supply as possible.
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What does this mean for the U.S.? First, exports of LNG have grown substantially. LNG exports in 2022 have made up 10 to 15% of the U.S. domestic production. Meanwhile, despite rising prices, gas production has not increased to meet to this new demand as most producers have held tight to investors' demands for careful management of capital (having been burned in the past when excess drilling has resulted in ongoing low gas prices for many years). Not surprisingly, natural gas prices in the U.S. have risen dramatically. Price increases are attributed to the rising exports coupled with strong demand in the U.S. (Such demand is due to recovering industrial demand and a hot summer. This combination results in lots of gas generation, which means less gas in storage for this coming winter.)
So, what can we expect in the U.S. from growing exports? At least in the short-term, higher natural gas prices. As Institute for Energy Economics and Financial Analysis (IEEFA) energy finance analyst Sam Reynolds recently stated: “Domestically, the U.S. is exporting more gas and importing higher prices.”
While some producer organizations have made the argument that production will increase to cover export needs, that has yet to occur. In the meantime, U.S. prices are higher than they have been since 2008 (other than one winter price spike in February 2021) and many analysts conclude that U.S. prices are now linked to global price volatility. The Industrial Energy Consumers of America have called for a slowdown in the Department of Energy authorizations for new LNG exports, but given the Biden administration’s desire to use LNG as a tool to blunt Russia’s wielding gas exports as an economic weapon, this appears unlikely. So, we can conclude that consumers in the U.S. should in the short-term expect both higher and more volatile natural gas prices as the world copes with its latest energy crisis. Whether this will continue many years into the future depends on whether U.S. gas producers respond by upping output, how quickly consumers around the world shift demand to alternatives such as renewables and nuclear power, and whether the vast supplies in Russia eventually rejoin European markets.
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