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The US builds for the future

Rapid rebalancing of the world's seaborne gas market will be crucial to the success of US exports

When buyers a few years ago started snapping up future supply from American liquefied natural gas plants that are now under construction it looked like a good bet. Asian demand was soaring, pushing up prices to the point where the arbitrage offered by cheaper US Henry Hub-priced LNG made the idea of shipping American gas to Asia a no-brainer.

Now, with sagging Asian demand, a glut of LNG supply in the market, and lower prices, contracted buyers are seeking alternative markets and some may even find it cheaper not to ship cargoes at all in the short-term, although they will still have to bear liquefaction costs under tolling agreements.

The first shipment of US LNG to Japan was delivered in January, supplying gas via the Panama Canal from Cheniere's Sabine Pass facility on the Gulf of Mexico to a Chubu Electric regasification terminal. The widening of the Panama Canal has lopped two weeks off the journey time, improving the viability of Asia-Pacific as a destination for US LNG. South Korea has also taken a delivery from Sabine Pass.

But the gradual restart of nuclear power stations in Japan, the world's largest LNG importer, and flat demand from South Korea, the second-largest national market, means demand will not rise as quickly as supply over the next couple of years. Much of the new output will come from the US and Australia, with the latter generally better placed than the US Gulf coast to supply Asia-Pacific markets.

Instead, buyers of US gas will try to sell more LNG to cheaper-to reach European and Latin American markets within the Atlantic Basin, as opportunities arise—an option made easier by the flexible nature of LNG contracts signed with US projects, which allow LNG to change destination more readily.

It looks unlikely, though, that the first wave of Lower 48 export facilities will be working at full capacity consistently over the next five years. Demand from the biggest consumers is too tepid to suck up all the new capacity, even if shipping rates are low and the Henry Hub-priced feedstock remains cheap.

This doesn't mean that US LNG plants already sanctioned will be abandoned—the revolution will still be liquefied. Energy Aspects, a consultancy, expects US (Lower 48) liquefaction capacity to grow from pretty much zero in 2015 to 65m tonnes a year in 2020, catapulting the country to third place in the export-capacity league behind Australia and Qatar. Two 4.5m-t/y trains at Cheniere's Sabine Pass project started up in 2016. A further 54m t/y or so of capacity is now under construction.

What happens after that depends on how quickly the global LNG market can deal with its overcapacity problem. Projects earmarked for greenfield sites could struggle to compete with additional capacity at the first wave of export facilities, which will benefit from reduced costs thanks to the existing infrastructure. That financial edge will also help the US to remain attractive for project developers, compared to, say, Australia, where costs are much higher.

US project developers also benefit from the tolling agreements prevailing in their industry. These mean LNG buyers commit to paying a fee typically in the range of $2.25-$3.50 per million British thermal units for contracted supply over the duration of their contracts, which effectively gives them the option to take cargoes—or not—depending on the state of the market, according to a November 2016 report from Columbia University's Center on Global Energy Policy.

Those tolls mean LNG buyers can be committed to paying several billion dollars to developers over the span of a long-term contract, regardless of the conditions elsewhere in the LNG market. The system helps reduce financial risk for developers.

Confidence over demand

A staggering amount of new US liquefaction capacity has been lined up for the next 15 years or so—more than 250m t/y of it, including that already under construction. Not all the projects will happen, but developers remain confident in the longer-term demand outlook. By early in the next decade, they believe, global economic growth and a switch to gas from less environmentally friendly coal, will eliminate over-capacity, ensuring they have growing, lucrative markets.

The main markets are still likely to be in Asia, as recently signed deals indicate. In January, the 8m-t/y Magnolia LNG, owned by Australia's Liquefied Natural Gas Ltd, said it had signed a non-binding heads of agreement to sell up to 4m t/y of LNG to India's Vessel Gasification Solutions under a 20-year contract. The deal for the Louisiana-located plant is on top of a 20-year 1.7m-t/y binding agreement with Meridian LNG Holding Corporation signed in 2015. That's if the project is built. Despite the agreements, timing for a final investment decision (FID) on the project was recently pushed back from 2016 to 2017 or 2018, with exports seen starting 2022 at the earliest.

Also in January, Texas LNG Brownsville, which is targeting a 2022 start up for the 2m-t/y first phase of a 4m-t/y project said it had signed non-binding terms with four buyers in southeast Asia and China for a total of 3.1m t/y. The first phase is at the front-end engineering and design stage and the developer is aiming for FID in 2018.

This article is part of a report series on LNG. Next article: Glimmers beyond the glut

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