US powerhouse in the making
The LNG building boom is just getting underway. When it's done, the US will be the largest exporter in the world
First there was Qatar, then Australia. The next liquefied natural gas super producer will be the US. The American Gulf Coast is seeing a boom in the construction of new export facilities that will be fed by the nation's vast shale gas reserves.
The wave of US LNG coming to the market started to build in 2016 when the first train of Cheniere Energy's Sabine Pass plant came on line, followed shortly thereafter by the second train. That project put US LNG on the map. In 2017, Trains 3 and 4 at Sabine Pass were completed, giving the US 18m tonnes a year of export capacity. Actual exports for 2017 were 12.24m tonnes. About a quarter of that went to Asia, another quarter to markets nearer to home in the Americas, especially Mexico, and smaller volumes to Europe and the Middle East.
This year will see a bit of a lull in the completion of new projects. The 5.2m-t/y Cove Point plant, operated by utility Dominion Resources, started up in March and the small-scale 2.5m-t/y Elba Island plant in Georgia is expected to begin shipments later this year. These will bring total capacity to 25.7m t/y, putting the US in a league with Nigeria and Malaysia, but still less than half Australia's capacity.
However, 2019 will witness a surge of new capacity vault the US near the top global producers. A fifth train at the Sabine Pass plant is due to start up, adding another 4.5m t/y of capacity, making it one of the world's largest plants. Cheniere Energy also plans to start up its Corpus Christi, Texas LNG facility in 2019, bringing online the first 4.5m-t/y production train. Freeport LNG will add to the capacity with three trains, totalling 13.8m t/y, at its namesake plant in Texas. Cameron LNG, a major project led by Sempra LNG, Engie, now owned by France's Total, and Japan's Mitsui, will also bring three trains online in 2019, totalling 15m t/y of capacity. Cheniere Energy will then add an additional 4.5m-t/y train at its Corpus Christi plant in 2020.
When the flurry of construction is finished by 2020 the US will have 68m t/y of LNG export capacity, putting it with Qatar and Australia as the world's big three exporters. The risks to these projects is relatively small. All are already fully funded, under construction and backed by long-term supply deals with major buyers. Their biggest risk is delay and cost inflation, although these aren't likely to be on the scale of the problems seen during Australia's LNG building boom when costs spiralled out of control. Unlike Australia, the US' LNG plants are mostly being built around the Gulf Coast, an already well established industrial area with a large workforce to draw on.
The more important question for the market is how much bigger US LNG can get. The global LNG market looks to be heading towards a new cycle of building out capacity, now that fears of a global glut have subsided. There are dozens of US projects on the drawing board that could be part of this wave. And although nowhere near all of them will go ahead, some almost certainly will.
The most likely projects to proceed in this second wave of new capacity are expansions at existing plants, which would have a distinct cost advantage over new projects. Cheniere Energy has drawn up expansion plans for both its Corpus Christi and Sabine Pass facilities. Cameron LNG has the ability to add two further trains, bringing the total to five with a combined capacity of 25m t/y. Freeport LNG has also outlined plans to add another train to its facility. All these projects are eyeing final investment decisions by 2020, putting them on track to start up by 2023. If all of them went ahead they'd add another 35m t/y of capacity, bringing the total to 103m t/y, well ahead of Australia and Qatar.
There are also very credible new greenfield projects targeting FIDs by 2020. Shell and US midstream major Energy Transfer have the regulatory approvals in place for a 15m-t/y plant in Louisiana called Lake Charles LNG. ExxonMobil, Qatar Petroleum and ConocoPhillips have lined up their own 15m-t/y project in Texas called Golden Pass LNG. Tellurian, a new company run by Cheniere Energy founder Charif Souki, is moving ahead with the Driftwood LNG project in Louisiana, which has a potential full capacity of 27.6m t/y.
In short, there are projects on the table that could conceivably bring the US to around 150m t/y of export capacity by the middle of the next decade. How much of that actually comes to fruition will depend less on the backers' ability to build the project and more on how much demand there is in the market—more specifically from Asian buyers—for American LNG.
US LNG's biggest advantage in the market is cost. American producers are marketing the product at a price linked to the Henry Hub benchmark, which has been attractive compared to typical oil-linked contracts, thanks to a glut of supply in the US. Potential buyers will have to decide if that will be the case for the next decade and beyond.
Bernstein, an investment bank, ran the numbers and found that with Henry Hub trading at around $3 per million British thermal units, US LNG could be delivered to Asia at around $8 to $9/m Btu. That includes the $3 cost of the gas itself; another $3 in liquefaction costs; $0.50 in supply and liquefaction operating expenses; and anywhere from $2.50 to $3.00 in shipping costs, depending on where in Asia the LNG was headed. That roughly $9/m Btu price at $3 Henry Hub is roughly in line with an oil-linked contract at anywhere between $55 a barrel to $75/b Brent.
In other words, there's no obvious advantage to Henry Hub-linked LNG at today's Brent price. LNG buyers will have to make a bet on the direction of both US gas prices and international oil prices.
Price on its own, though, won't be the only consideration. Some buyers will like the price diversification offered by Henry Hub-linked contracts, which will reduce exposure to potential oil price spikes-—LNG prices have been driven to more than $20/m Btu in Asia in the past. The US is also relatively free of geopolitical risk—although president Donald Trump's talk of "energy dominance" seems to imply some risk of the administration using energy as a political and economic weapon. Other countries, China especially, could see buying American LNG as a useful way to cut their trade deficits with the US and curry favour with the Trump administration, which has actively promoted American LNG.
The other aspect for the future of US LNG is ensuring there's enough gas to keep all the new export facilities humming. On that front, there doesn't seem to be much risk, at least for the foreseeable future. The Marcellus and Utica shale-gas plays in the northeast have plenty left to give, while surging oil output from the Permian is going to bring a lot of associated gas with it. With demand from the power and industrial sectors flat, producers are keen to see new LNG export facilities built to soak up the new output.