Why LNG Exports From The US Are Off To The Moon
Where does LNG come from?
Liquefied Natural Gas (LNG) comes from natural gas by lowering its temperature to minus -260F, when it changes from gas to a clear, colorless, non-toxic liquid. This gives it portability – it can be shipped by truck or sea-going tanker.
The Marcellus and Utica shales in the Appalachian region in the northeast US provide about 30 Billion cubic feet per day (Bcfd) which is about a third of the nation’s total natural gas (90 Bcfd).
The next largest gas-only play is the Haynesville Shale in Louisiana and East Texas. The Haynesville Shale is the largest continuous natural gas assessment ever made in the USA. The advantage here was proximity to LNG terminals on the Gulf Coast that could ship the product overseas.
The trend will continue according to EIA, although the trade war between US and China has cooled things a bit. But the market potential for China using LNG to replace coal-fired boilers and power plants is potentially huge.
Cheniere Energy is a big LNG exporter and three years ago signed on to export to China 1.2 million tons of LNG per year for 20 years (from 2023 to 2043.) But the deal fell through due to the trade war between US and China. In mid-2020 a separate deal was signed with a Chinese company called Foran Energy Group, and cargoes of LNG have resumed cautiously.
The export of LNG has increased from nothing to 10 Bcfd in just 5 years (Figure 1). It’s an amazing turnaround from natural gas production that was declining in the US as recently as 2005. In 2018, US exports of natural gas exceeded imports for the first time since 1957, when Russia launched Sputnik into orbit.
Four new LNG terminals since 2018 (Figure 1) are sending out enormous tankers of LNG to markets in Southeast Asia. In the US, LNG spot market prices have been lower than prices for overseas markets this year. This price difference motivated record volumes of US LNG exports.
Early in 2021, spot prices spiked to $20 per Million Btu in the Japan/South Korea market, but quickly fell back to $6. Countries over there want the gas and are willing to pay a premium price. Then began a gradual doubling of prices to $12 in June 2021.
Spot prices in the European market have tracked the Japan/South Korea market this year because they need to refill storage supplies.
The runup in US exports later in 2020 was due to recovery from the pandemic, as well as unplanned outages from competitors such as Australia. The US is now producing at near total capacity of 11 Bcfd.
There is big money to be made by exporting LNG as the price differential between LNG within the US and overseas is large. Second, the market is getting stronger with China wanting LNG for local burners and boilers to reduce the high levels of pollutants that come from burning so much coal.
Figure 2. LNG exports from US, by destination.
Where does the exported LNG go?
The bulk (83%) of LNG exports go to two regions of the world. In 2021, 46% of LNG goes to Asia, followed by Europe with 37%. EIA expects LNG exports to remain near 10 Bcfd for the rest of 2021.
China views natural gas as a halfway house in the transition to renewables, which they are committed to. While China is 70% fossil energies now, they plan to be 90% renewable energies by 2060.
“Despite the stresses of the pandemic, policy priorities in China continue to favor broad based adoption of cleaner-burning fuels to displace coal,” said AnatolFeygin, Cheniere’s Executive Vice President and Chief Commercial Officer. “There’s a tremendous amount of gas demand growth. And we are very well-positioned to serve that,” he noted.
The 600 new and different locations for new coal-fired power plants planned for China will provide energy security that China badly needs to grow its economy. Meanwhile, China is far ahead of any other country in solar, wind and battery construction – including a dominant hand in the game of acquiring metals like lithium, cobalt, and the rare earth elements.
So, the exports of LNG to China and other countries in southeast Asia may boom for many years, especially if the US demand for natural gas falls as gas-fired power plants in the US are displaced by wind, solar and batteries. If China elects to switch their power plants from coal to gas-fired, then “displaced gas” from the US may fill the gap in China.
But if China decides to switch power plants from coal-fired to renewables directly, without a gas halfway house, the LNG boom in the US won’t last as long.
The US should be aware of a possible long-term result (think after 2050) that China won’t need any more LNG from the US because they have based their energy security on renewables: wind, solar, hydro, and nuclear.
Competition with other exporters.
By the end of 2018 there were 550 LNG tankers on the high seas.
In 2020, Australia and Qatar are almost equal first in LNG exports, with the US coming in third at little more than half of the leaders. By 2023, the USA may overtake the front-runners.
Australia’s LNG rides on the back of two gas resources: coalbed methane in Queensland and New South Wales, and conventional gas offshore of the northwest of the country. Each region has built huge LNG trains with costs in the billions of dollars, to process and liquefy the gas ready for shipping to southeast Asia. When this started 10-15 years ago, the price markup from Queensland coalbed methane to LNG in southeast Asia was large.
What about greenhouse gas emissions from LNG?
The final reason LNG exports have risen so fast is that LNG is a clean-burning gas that can replace coal-burning power plants. Being natural gas, LNG burns to 117 pounds of CO2 per million Btu versus 210 pounds for coal (all types), so the advantage is obvious.
A curious aspect of this topic is that drillers and exporters of LNG are responding to concerns from international customers, bankers, and investors about climate effects of methane leaks during production and distribution of the natural gas. Companies like EQT Corp EQT -1%, the top US gas producer, and Cheniere Energy, the top exporter, are using specialized cameras, drones, and planes to actually measure and fix methane leaks in their wellheads, pipelines and other storage devices.
The key is that LNG is only a true halfway house in replacing coal-burners if the total methane leaks lie below a certain level (of a couple percent.) The reason is methane is 20-80 times more powerful than CO2 as a global warming gas. So, if methane leaks lie above this threshold, burning LNG in power plants is no better than burning coal in the larger picture.
As the captain of an LNG ferry boat carrying passengers between Sweden and Finland said, “There’s a huge difference between diesel-driven and LNG-driven ferries. I will never go back.”