The U.S. will be exporting liquefied natural gas (LNG) abroad due to an expanding resource base, increasing production, and higher prices in outside markets. Despite lower prices, "the shale revolution" will help output climb this year for the 11th straight time, rising 2% to a new record of over 81 Bcf/day. The U.S. will become a net exporter of gas this year or next.
This month,
After Qatar and Australia, the U.S. could easily become the world's third-largest LNG supplier by 2020. We have a great advantage over other LNG exporters because we can reconfigure our vast LNG import structure to export. These Brownfield projects to convert existing re-gasification facilities to liquefaction facilities can provide a 35-50% cost savings relative to new, greenfield LNG projects. Brownfields make permitting easier to secure and reduce capital expenditure because they already have the storage tanks and complex facilities in place.
The U.S. Department of Energy has approved projects that may send as much as 10 Bcf/day of U.S. gas abroad and is considering applications for another 35 Bcf/day, which is just slightly smaller than today's global market. Overall, the investment in LNG export infrastructure along the Gulf Coast and Chesapeake Bay is over $50 billion.
Despite the concern among U.S. manufacturers that are benefitting from huge amounts of low-cost, domestic natural gas as feedstock, the country can absorb large-scale LNG exports. U.S. industry has such a big lead over competitors in Europe and North-East Asia where gas prices have been be 2-5 times higher.
The U.S. Energy Information Administration has confirmed that 12-20 Bcf/day of LNG exports would increase domestic gas prices by just 4-11%, per million Btu. And a recent study by Oxford Economics and Rice University concluded that U.S. LNG exports of 20 Bcf/day would increase U.S. domestic gas prices by just 17 cents.
The scale of U.S. LNG exports would be naturally limited by the competition from other existing suppliers around the world as a global gas market continues to take shape. And LNG export is a very expensive business (e.g., the first phase of Sabine Pass will cost over $12 billion), making exports slow and controlled.
Yet, slightly higher prices would actually help us because they would help the profitability of producers of natural gas, our emerging energy source that is lowering GHG emissions and needed to backup intermittent wind and solar. U.S. LNG export gives our companies another baseload market to turn to when domestic issues arise. Limiting U.S. LNG exports would not push significant volumes of natural gas into the domestic market, but likely just keep them in the ground instead.
As recently stated by The Macroeconomic Impact of Increasing U.S. LNG Exports: "Greater volumes of LNG exports support continued long‐term expansion of U.S. production." LNG export supporter Energy Secretary Moniz "We are certainly not resource limited." In fact, LNG exports have received bipartisan support (see here), which is becoming increasingly less common (have you ever seen the nation this divided?). Overall, the U.S. could need 100 LNG ships over the next 30 years.
Asia, Europe Demand
Ultimately, Asia is the natural fit for U.S. LNG, especially given the $5.3 billion expansion of the Panama Canal set to open this Spring, cutting costs and the trip from the U.S. Gulf Coast to Asia by 11 days. And "this will allow ports along the U.S. Gulf and Atlantic coasts the chance to compete with their West Coast rivals for vessel traffic."
Although projections for China's 2020 natural gas demand have been lowered by about 15%, the country is on track to reach gas constituting 10% of energy supply by 2020, compared to 5% by 2013. China's focus on cleaner gas stems from "heavy city smog that has forced government to raise pollution advisories to their most severe level, prompting school closures, traffic restrictions and factory operation limits." China recently lowered city-gate gas prices nationwide by nearly 30% to spur demand particularly among industry.
And China will need to increasingly turn to global suppliers for gas: from 2009-2015, gas production increased 46% to 12 Bcf/day, but demand also increased 110% to 18 Bcf/day. Despite copious amounts of shale gas (technically recoverable resources are estimated at 1,115 Tcf), the best chance to increase domestic output, development has been slower than anticipated.
But, Asia overall seems even more distant today for U.S. LNG because gas prices worldwide have plummeted. This is especially true in Asia because prices are more heavily linked to crude oil than in Europe, and oil prices collapsed to 11-year lows to end 2015. "JKM prices, a maker for delivery in Asia, have fallen by two-thirds since the 2014 peak. February 2016 delivery cargoes are going for $7 per million Btu."
Although just 1/5 the size of the Asian gas market, enter more proximate and contract flexible Europe, seeking to reduce its long dependence on more politically risky Russian gas that accounts for about 35% of the EU's gas imports (a good assessment here of EU vulnerability to Russian gas supply disruptions). With import diversity required, the EU's gas electricity demand is expected to rise nearly 30% by 2025 alone.
Turkey, consistently a top performer in the G-20 that will require lots more fuel to grow and an increasingly vital transit hub for energy, imports 60% of its gas from Russia and seeks "alternatives to Russian energy after plane crisis." "Turkey May Be Biggest Buyer of U.S. LNG Exports," with overall gas demand up 40% since 2010 to 5.2 Bcf/day. Importantly, natural gas now supplies over 50% of Turkey's power, compared to less than 20% in the EU.
Helping the World
While the export of U.S. LNG is sure to spark more gas production growth, high-paying jobs, tax incomes, and economic growth, in a world drastically deprived of energy (85% of the global population lives in undeveloped nations), exporting U.S. energy is really a moral obligation: over 650 million Sub-Saharan Africans have NO electricity, for instance.
"Ghana: sub-Saharan Africa’s first LNG importer." Coming from the best companies in the world, highly reliable U.S. LNG exports will add crucial flexibility for supply and pricing to gas markets. In many energy short nations, "LNG is the cheapest imported fuel."
While there is a global LNG (and fossil energy overall) glut, this will surely be eroded over time. Gas is becoming even more crucial in our post COP21 world (see here). The U.S. stands in a very wonderful and unique position: we can help supply natural gas to the world, which legendary energy thinker Vaclav Smil calls "Fuel for the 21st Century." It's very telling that the industrialized nations seeking to cut GHG emissions most are continually turning to gas. The coal-based developing world is sure to follow suit. Replacing coal with gas reduces CO2 emissions by 40-50%.
Blocking U.S. LNG (or other energy) exports confirms us as hypocrites. For example, the World Trade Organization upheld the U.S. challenge to China’s restrictions on the export of rare-earth metals. But, it's better policy that must unleash U.S. LNG. Regrettably, today's application to export LNG to non-free trade agreement nations must be approved by various government bodies in a process that can take years. Any delay is harmful because the U.S. faces less arbitrage opportunities and a new wave of competition as the market evolves.
U.S. LNG exports are being called "the Most Powerful Demonstration of U.S. Geopolitics in Decades," helping to give the power to buyers in negotiations. Even the threat of U.S LNG has been an important geopolitical lever to contain Russia's grandiose ambitions, easily the largest gas exporter in the world. Take Lithuania, which has been overpaying for Russian gas but recently used a proposal for floating LNG import terminal to win a 25% discount from Russia's Gazprom. The Baltic States exemplify a growing willingness for importers to pay a little more for U.S. LNG to reduce dependence on Russia.
In the light of the much-anticipated lifting of Western sanctions, rogue-state Iran seeks $40 billion from foreign investors for more gas infrastructure to export. The potential is massive: Iran leads with over 1,200 Tcf of proven gas reserves, but its share of the global trade is less than 1%, exporting just 7% of what Russia does (combined, Iran and Russia hold 36% of all gas reserves).
And the emerging energy relationship between oil and gas powerhouse Iran and India, with the latter being the most energy deprived nation in the world, is a growing concern that the entire West must buffer. To illustrate the power of shale, the U.S. oil boom is now a great calming influence for the international oil market amid rising tension between Saudi Arabia and Iran.
The Competition
Especially in the context of low energy prices, the cost of shipping LNG from the U.S. to Europe or Asia won't be cheap, but other key LNG exporters face a variety of issues that will open the door for us:
- Indonesia: exports have been falling because of rising domestic demand, and still using just 750 kWh of electricity per capita, far below world average of ~3,500 kWh, more gas is needed to lift low living standards.
- Norway: amid proven reserves falling 20% since 2004 and production flat at 10.8 Bcf/day in recent years, output is projected as "shrinking."
- Algeria: considering strong restriction to investment, "internal conditions in the country may transform it into an importer over the next decade," and has had just a 50% utilization rate in recent years.
- Malaysia: as a "$700-million corruption cloud engulfs Malaysian prime minister," the country "needs to attract higher levels of investment and technical capabilities to develop deepwater fields," but 77% of respondents now rate Malaysia’s climate for doing business as "easy or very easy," down from 91% in 2014.
- Qatar: the U.S. and Australia combined are constructing LNG export facilities that will have nearly 30% more capacity than what leader Qatar has had, holding 33% of global trade.
Australia and Canada, the other emerging free market LNG exporters that are highly valued by importers, will also face problems with their more expensive Greenfield projects. Australian LNG confronts cost overruns that have surpassed $30 billion. Projects off the BC coast in Western Canada are facing long delays amid rising global competition, environmental pushback, and potential rising carbon taxes, possibly missing out on $23 billion by 2020.
