LNG export facilities move forward in down market
Later this year, the first facility in the lower 48 states that is designed to export liquefied natural gas should begin shipments from the U.S. Gulf Coast.
It’s preparing to do so in a buyer’s market, where oil and natural gas prices have stayed stubbornly low. Globally, one of the biggest gas consumers, China, is also seeing slower growth than had been predicted.
Prolific production from shale plays across the United States, including the Marcellus Shale, have producers looking overseas to sell natural gas to deal with the domestic supply glut of natural gas. Meanwhile, other countries, like Australia, also want to export their own gas supplies.
The first mover, Houston-based Cheniere Energy, plans to begin shipping LNG from Louisiana. The facility, Sabine Pass, ultimately will be able to ship about 4.5 million tonnes per annum.
Global consultancy Wood Mackenzie noted that, despite the outlook for LNG demand on a worldwide scale looking “increasingly subdued,” the number of projects lined up for a final investment decision in 2015 and 2016 has not faltered.
In a report released earlier this month, the firm said that if there are no postponements, “The market could see an additional 100 million tonnes per annum of LNG sanctioned in the next six to 18 months, extending the likelihood of an oversupply of LNG to Asia in 2025.”
While one company, BG Group, postponed its proposed LNG export project at Lake Charles on the Gulf Coast, “BG’s postponement has been an exception,” according to Noel Tomnay, vice president, global gas & LNG research for Wood Mackenzie.
Global liquified natural gas supply is around 250 tonnes per annum, and there is another 140 million tonnes per annum under construction, according to Mr. Tomnay.
Rafael McDonald, director of global gas and liquified natural gas for IHS Energy, notes the LNG sector is prone to cycles. “These cycles have a tendency to be out of sync with each other, entering a period of large supply growth and not seeing demand grow as quickly,” he said.
China’s role shifting
Currently, China is one of the top three destinations for liquified natural gas. In 2014, China imported about 20 million tonnes per annum, according to IHS. Japan is the world’s largest consumer, followed by South Korea.
South Korea imported about 38 million tonnes per annum in 2014, according to IHS, nearly twice what China imported. IHS expects that this decade China will surpass South Korea, where growth is stagnating.
Wood Mackenzie’s Mr. Tomnay said China’s LNG import commitments are set to rise by 17 percent, year-on-year between 2015 and 2020, but he said the country will struggle to absorb all this liquified natural gas so quickly.
“In contrast, China’s LNG imports fell by almost 4 percent [year-on-year] in the first half of 2015, as a consequence of subdued industrial output and fuel competition, which was driven by relatively low priced oil. … Asian buyers are not in a hurry to finalize new LNG contracts,” Mr. Tomnay added.
Wood Mackenzie expects the market opportunity for selling new supply into Asia will not open up significantly until after 2022. That means final investment decisions on new projects might not have to be made until 2017.
“The thing is, demand rises and falls but the construction cycle for LNG export facilities is such a long time,” said Mihoko Manabe, senior vice president, infrastructure finance at Moody’s Investors Service.
“You have to see through these cycles in demand. That’s the reason why when a company makes the big investment decision; it’s with all the future revenue secured in long-term contract.”
For projects still on the drawing board, whether they advance to construction will depend on whether they can find buyers willing to do a long-term contract, typically 20 years, Ms. Manabe said.
U.S. projects bank on Japan, Korea
As for the U.S., shale gas will ship to Asia, but China is noticeably absent from contracts there, Mr. McDonald said.
Japan has the biggest stake in U.S. LNG at 17 million tonnes per annum, followed by South Korea and India.
There are 35 projects announced to export natural gas from the U.S., each in various stages of permitting and development. Five are under construction, with Chenier’s Sabine Pass expected to begin exporting later this year.
While most of the projects are in the Gulf of Mexico, the facility closest to the Marcellus Shale region is Cove Point in Maryland. Dominion Resources is developing the 5.25 million tonnes per annum project on the Chesapeake Bay and expects it to be in service in 2017. However, Marcellus gas can access facilities in the Gulf as well.
The companies developing these projects have insulated themselves from the price swings of natural gas due to the structure of the contracts they have signed with customers.
It’s the so-called aggregators — companies who take the gas and try to sell it to groups of end-users — that could feel the most pain. BP and Royal Dutch Shell are two such aggregators.
“Low prices will be felt by the aggregators who are going to look for end-use markets while facing competition at lower prices,” Mr. McDonald noted. If there’s a reward — say, surging gas prices — “They’ll get that as well.”