Will the U.S. Become One of the World’s Largest LNG Suppliers?
by Bob Shively, Enerdynamics President and Lead Facilitator
There's a quiet revolution in the U.S. natural gas business: Producers are no longer drilling just to provide supply to the U.S. consumer. Exports of liquefied natural gas (LNG) mean that producers are now also supplying consumers in Asia, Europe, Mexico, and South America. With production soaring to all-time highs, exports provide an important safety valve to keep a supply glut from causing prices to drop lower than their already low levels. All factors suggest that exports will continue growing. Within the next two years, the U.S. may well become one of the world’s largest players in the LNG business. This will be a radical change for U.S. gas producers as just a few years ago LNG export capability was limited to one small facility in Alaska.
Source: EIA plus Enerdynamics forecast for 2018
Driving LNG exports are three critical factors:
- Gas prices in the U.S. are low relative to other regions of the world.
- A rapid expansion of LNG export capacity is making new exports possible.
- World demand for LNG continues to grow.
Let's look at each more closely...
1. Pricing
Price differentials between U.S. markets and key LNG markets have narrowed in recent years, but are still large enough to attract buyers, especially those in Asia. A big advantage for U.S. producers is a willingness to price LNG indexed to Henry Hub rather than the traditional oil price index.
2. U.S. Export Capacity
By 2021, six large export terminals will have been completed in the U.S. (Sabine Pass, Cove Point, Elba Island, Corpus Christi, Cameron, and Freeport). This wave of construction has rapidly increased export capacity. After 2021, there will at least be a pause in growth, as no additional projects have entered the construction phase.
Source: EIA
3. World Demand for LNG
World demand for LNG imports has continued to grow, increasing by close to 30% over the last five years. Demand is expected to continue to grow with increasing demand from economies in China, India, Japan, and South Korea as well as numerous smaller countries replacing other fuels with cleaner natural gas. The number of LNG importing countries has grown from 28 in 2013 to 36 in 2017. This growth has, too date, been able to provide markets for the new export capacity built in the U.S., as well as new capacity in Australia and Russia.
Source: International Gas Union, 2018 World LNG Report
Where Does this Place the U.S. in World Markets?
As of 2015, the U.S. was the world’s fifth largest LNG player.
Source: International Gas Union 2018 World LNG Report
Within a few years, it is expected that the U.S. will surpass Nigeria and Malaysia to compete with Australia for the position of the world’s second largest LNG provider. The key question is whether developers will begin a new wave of export projects in the U.S.to keep the countries’ output rising. As can be seen below, additional projects have been approved but are not under construction and numerous other projects are proposed.
Source: FERC website
The current approved projects, if built, could again almost double U.S. export capacity. If this were to occur, the U.S. could theoretically come close to approaching Qatar’s current sales. Of course, a lot has to happen between now and then. Project developers must receive sufficient commitments from customers to feel comfortable making a final investment decision (FID). This is no small decision as each project may cost in excess of $4 billion to build. And other potential suppliers in the world are not sitting idly waiting for the U.S. to take over the market. Qatar, Australia, Nigeria, and Russia are all planning export terminal expansions as well.
The current U.S. administration’s efforts to restructure trade arrangements could get in the way, as China has instituted a 10% tariff on U.S. LNG imports in response to tariffs set by the U.S. The current U.S. supply glut could shrink, resulting in rising prices while other suppliers who have smaller domestic demand could keep their prices low. There are lots of unknowns in the LNG business, which make the required large upfront capital investments a risk. But there is certainly the possibility that investment could continue, and the U.S. could become a world leader in LNG trade.
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