First U.S. Ship with Exported LNG Sails into Uncertain Global Market
by Christina Nagy-McKenna, Enerdynamics Facilitator
February 24, 2016, marked the departure of the first liquefied natural gas (LNG) tanker filled with U.S.-
produced, non-Alaskan natural gas bound for an overseas market. The Asia Vision sailed from Sabine Pass LNG terminal in Texas and headed for Brazil.
The road to the export market began in 2011 for Cheniere Energy, the company that owns the Sabine Pass facility and the first company to apply for an export license with the U.S. Department of Energy. During the subsequent five years several things occurred:
- Russia made it no secret that it was unhappy with the prospect of competing with the U.S. for natural gas sales to Europe;
- natural gas prices fell to $1.85/MMBtu at Henry Hub;[1]
- global market demand no longer could keep up with expanding supply;
- and Australia roared into the LNG export market.
The natural gas market, like all commodity markets, is a moving target that once again is shifting. But for U.S. production there is a new factor: global price exposure due to U.S. LNG export capability. Two years ago Russian President Vladimir Putin expressed his doubt that U.S. exports of LNG would impact his country’s substantial market share of natural gas in Europe. Asian markets, in Putin’s opinion, were more lucrative for the U.S. However, the economic slowdown in China, the drop in global oil prices, and the return of nuclear-generated electricity in Japan, have put downward pressure on natural gas prices in Asia, thus making it a less lucrative market for LNG exports.
Let's explore some key questions that surround what effect LNG's impact may have on U.S. gas markets:
Can U.S. LNG erode Russia’s Eurpoean market share?
While the European Union may be cautious about doing business with Russia because of recent geo-political events, European utilities do not share the EU’s concern. This means that whoever wins the European market will have to do so with competitive prices.
Whether the Russians, with a weak ruble and falling oil and gas prices, can compete long term in a slash-and-burn economic fight is up for debate. Some analysts forecast that Russia will take a page out of the Saudi playbook and simply crank up the volume on production, flood the market, and absorb the impact from lower prices. Others believe Russia has no room to cut prices based on their analyses of Gazprom’s production and transportation costs. The mild winter weather in Europe this year is not fueling the issue. It will be one to watch during the winter of 2016-2017.
Will U.S. demand remain weak relative to supply?
Henry Hub prices and those across the U.S. are at a surprisingly low point, especially since the winter season has yet to end. However, a mild winter and record gas production has led to what is perhaps the lower end, if not the bottom of the market, and this is taking a toll on producers.
Steve Mueller, former CEO of Southwestern Energy, stated last year that higher drilling rig efficiencies have led to lower costs and huge time-savings. The company can now drill twice as far in less than half the time due to technological advancements in the drilling process. However, the darker side of very low prices and robust supplies has reared its head for the company as it announced in January a workforce reduction of more than 40% of its employees. The company had no active drilling rigs at the time, and this was the second workforce reduction since the third quarter of 2015.
In the meantime:
- Residential and commercial U.S. consumption is down this winter, according to the EIA.
- Storage working gas stocks may end the winter season with close to 2,336 Bcf, above the five-year average and close to the record of 2,473 Bcf set in 2012.[2]
- Low U.S. prices make overseas market more desirable, but they also may be the undoing of the production boom if prices continue to decline.
Will world demand also remain weak?
The U.S. market is not the only one in which demand is weak:
- Platts’ Eclipse Energy Group reports that global demand growth in 2015 was only 700 MMcf/d,
while 2.2 Bcf/d of new export capacity was added to the market.[3]
- Chinese manufacturing has declined for the 11th straight month as of the end of January, and it may be slow to recover as the government moves away from a strategy of increased exports and large capital projects to one of increased domestic demand.
- Japan has restarted two of its 43 nuclear power plant units that have been off-line since September 2013 following the implementation of stricter safety rules due to the Fukushima nuclear disaster. Twenty-five units have applied for safety inspections that would allow them to restart in the near future. This would reduce Japan’s demand for natural gas as a fuel for electric generation.
Will Australian LNG supply further erode market opportunities?'
Australia also is ready to make its presence felt in the global LNG market. Gorgon LNG in Western Australia is a mega project operated by Chevron and owned jointly by Exxon Mobile, Shell, Osaka Gas, Tokyo Gas, and Chubu Electric Power, presumably giving it the inside track on portions of the Japanese market. Chevron announced this week that it expects its first shipment of LNG to depart Barrow Island later this week. Two more liquefaction trains will come on line in the next year. In addition, three other LNG projects are under construction in Australia and three additional projects have been commissioned since 2014. The EIA estimates that Australia will have a capacity of 11.5 Bcf/day by 2019 and will overtake Qatar as the world’s largest global liquefaction capacity holder.[4] Some of the LNG will stay in Australia, but the majority is earmarked for Asia.
To say that the U.S. natural gas market is in an uncertain position is like saying “situation normal” for this volatile commodity. The greater change is the geographic reach of implications as the U.S. enters the global LNG market as an active seller. Just a decade ago such a scenario seemed ludicrous as the U.S. looked to the LNG market as a means of garnering additional supply. Now, in 2016, the U.S. is officially in the export business, and those in the industry will watch intently to see how market competitors like Russia, Australia, and Qatar respond.
Footnotes:
[1] Henry Hub Natural Gas Spot Price, Energy Information Administration
[2] Natural Gas Weekly Update, Energy Information Administration, March 9, 2016
[3] “The U.S. Enters a Brave New World as It Begins LNG Exports,” The Barrel Blog, Platts.com, February 10, 2016
[4] Natural Gas Weekly Update, Energy Information Administration, March 9, 2016