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There she blows

LNG from the US’ lower 48 has set sail on troubled waters

AT LONG last, the first shipment of liquefied natural gas left from Cheniere Energy’s Sabine Pass export terminal on the Gulf of Mexico for Brazil on 24 February, marking the entrance of the US as a major player on global gas markets. Celebrations, though, were muted. New US exporters will have to carve out a role for themselves in a glutted market with a markedly poor short-term demand outlook.

Sabine Pass was the first of a wave of five LNG export projects that are under construction and will start exporting the US’ bounty of shale gas riches before the end of the decade. A second train at Sabine Pass will be completed in the coming months followed by trains three and four in six-to-nine month intervals. When complete, it will be able to process 3.5bn cubic feet a day (cf/d) of gas for LNG, making it one of the largest plants in the world.

It will be followed in late 2017 by Dominion Energy’s smaller 0.82bn cf/d Cove Point facility in the northeastern state of Maryland, which will source gas from the prolific Marcellus and Utica shale gasfields. Several other developments will come along in short order afterwards.

Altogether, these projects will have around 10bn cf/d of processing capacity, equivalent to around 15% of expected US total natural gas output and comprising about a quarter of total global LNG processing capacity.

On top of these projects under construction, the US Department of Energy has approved more than 30 proposed LNG export plants around the country. Given the weak international market outlook – and that projects further along the construction process still have uncommitted capacity – it is doubtful any more new developments will move ahead in the next couple of years.

The most likely exception is the three-train 2bn-cf/d Lake Charles LNG, owned by midstream player Energy Transfer and Shell, which acquired an interest in the project through its BG takeover. The facility has received all the needed permits, but the change in ownership with Shell, and Energy Transfer’s pending deal with Williams, could slow decision making, pushing its startup at least into the early 2020s.

Timing is everything

For the projects that are coming to fruition, navigating a difficult market is now the priority. As Cheniere and other LNG plant owners have been at pains to point out, most of the gas supply is already committed under take-or-pay contracts, which reduces some of the financial risk for operators. But given the oversupplied market, some facilities could face years of low utilisation rates.

Most of the gas supply is already committed under take-or-pay contracts, which reduces some of the financial risk for operators. But given the oversupplied market, some facilities could face years of low utilisation rates

The relationship between domestic natural gas prices and international crude prices – against which most international LNG is still priced – will be key. When the rush to build US LNG exports started a few years ago, the economic case was clear. The huge gap between US gas prices at $3.00 per 1,000 cubic feet and $100-a-barrel Brent meant that, when it arrived, US LNG would be half the price of LNG in Asia.

That was the hope, anyway. Since then, the plunge in international crude prices has wiped out US LNG’s price advantage. Today, even with sub-$3.00/’000-cf Henry Hub gas, US LNG would struggle to compete in Asia. Japan, for instance, paid an average of $6.50/’000 cf for spot LNG purchases in February. Assuming a typical cost structure for US LNG – a $3.50 liquefaction fee, $3.00 shipping cost and 115% of $2.00 Henry Hub gas for feedstock – it would land in Asia at around $8.80/’000 cf.

Even with ultralow $2.00 US Henry Hub, crude prices would have to rise to at least $50/b for US LNG to be competitive in Asia. If US gas prices rose to $4.00/’000 cf, they would need at least $75/b.

Lower shipping costs make US LNG about $2/’000 cf cheaper in Europe, and for that reason most initial shipments are expected to go across the Atlantic. That will be welcomed by politicians promoting it as a way of diversifying European supplies.

But in Europe, too, US LNG faces a complex market dynamic. Oil-linked LNG coming from Qatar and elsewhere is one matter. It will also compete with coal, for now Europe’s cheapest fuel.

Then there’s Gazprom. To defend its market, the Russian producer could do what Saudi Arabia has done in oil, cheapening supplies to make US exporters uncompetitive. A gas price war in Europe would inflict severe economic damage on Gazprom itself, but can’t be ruled out if the company sees US LNG as an existential threat in Europe. Wood Mackenzie, a consultancy, reckons that an aggressive Gazprom strategy, combined with low coal and oil prices and higher US gas prices, could see as much as half of the US’ LNG capacity idled between 2017 and 2020. It’s unlikely to play out, but US LNG clearly faces a turbulent beginning.

This article is part of an in-depth series on offshore production. Next article: Rocky shores for Canada.

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