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Turkey offers opportunity for US LNG

The emerging economy’s surging demand proves it is not all doom-and-gloom for US exporters

As analysts scramble to assess Covid-19’s impact on the global economy, the already bleak prospects for the LNG market in 2020 look even starker. This presents a serious challenge for US overflowing gas production, which has been at the core of trade deal negotiations and President Trump’s re-election campaign.

In his Davos speech in January, Trump made it clear just how important energy exports are for US foreign policy. He urged European countries to use America’s vast natural gas supplies to achieve energy security and eliminate their reliance on “unfriendly” energy suppliers. 

During the last four years, LNG has rightly earned its status as a ‘darling’ of US exports. It has helped to make the country the third largest energy exporter while acting as a relief valve for shale oil producers. As oil output from shale basins in West Texas and New Mexico soared in recent years, vast amounts of natural gas are being extracted as a by-product.

Covid-19 victim

However, this star status—along with America’s promise to help Europeans achieve greater energy security—is quickly losing its sparkle. The Covid-19 pandemic, which has shaken an already oversupplied LNG market and depressed prices even further, left US LNG producers scrambling for new export markets and cast doubts over its ambition to grow LNG deliveries by 55pc in 2021.

Cheniere Energy, the largest US LNG exporter, had to calm its investors in February as two of its planned cargo shipments were cancelled by a European buyer with other long-term contracts also in jeopardy for 2020.

Asian importers, which absorb significant global LNG supplies, have been largely outside of the US’s reach. This looked set to change with part of trade deal with China, known as Phase One, that committed it to increasing its purchases of American energy products—crude oil, refined products, LNG and coal—from 2017 levels by at least $18.5bn this year and $33.9bn in 2021. 

The deal was touted as great progress in the US-China relationship by the Trump Administration in January but hopes for the newly signed energy section of the trade deal are dwindling fast.

US energy exports are also proving a hard sell in other markets such as India, which is benefitting from low LNG prices and could in theory accommodate some US supplies. However, Trump’s recent visit to India, while optically impressive, brought no good news for US energy product exporters—and there is no imminent trade agreement in sight. 

However, large US producers such as Cheniere are right to guide their worried investors to a stronger outlook for LNG in the long term. On the company’s annual earnings call in February, Cheniere’s CEO Jack Fusco said that growing economies and rising prosperity will underpin demand in Asia once it recovers from the Covid-19 blow, while an increasing focus on sustainability and a drive for cleaner energy resources will ensure LNG remains a fuel of choice for decades to come. 

But, in the meantime, US LNG producers will have to find alternative markets to offload their production, ease the pressure on US domestic gas prices and keep US jobs intact.

In this context, there is some good news. 

Turkey demand

While many European and Asian importers decreased trade with the US over the past year, Turkey followed the opposite trend and emerged as the second largest importer of US LNG in Europe and Central Asia. As a net LNG importer benefitting from low prices, Turkey has been steadily increasing its LNG imports over the last several years—making LNG a key part of its long-term strategy to decrease its dependence on Russia.

Turkey received its first US LNG delivery from a Sabine Pass facility in Louisiana in 2016 and imports have recently surged. Turkey achieved 363pc year-on-year growth in US LNG imports for the first half of 2019. At the same time, Turkey’s pipeline gas imports from Russia decreased by 36pc.

For decades, Turkey relied on pipeline gas from its neighbours in the region, with Russia providing over half of its total gas supplies. However, Turkey’s targeted efforts to diversify its energy suppliers and increase the share of LNG in its total energy mix have been paying off; last year, for the first time, LNG made up 30pc of the country’s total energy mix. This approach has also meant that Turkey significantly boosted its LNG infrastructure capacity and expanded its LNG storage facilities to accommodate greater volumes of LNG imports, including from the US. 

Europe’s quest for greater energy security is another reason for Turkey and the US to take a more strategic look at their bilateral LNG trade. The Russia-Ukraine conflict opened new opportunities for Turkey to promote itself as a key transit state to transport gas from the Caspian and the Middle East to EU member states. In light of this, some US LNG which might otherwise have been dispatched to Asia may find its way to Europe—via Turkey.

To make this work is in the interests of both Turkey and the US—as well as the EU—and commercial considerations need to be balanced with strategic interests. US members of Congress and the administration have repeatedly expressed concern over Nord Stream 2, TurkStream and other projects they assert would deepen Europe’s reliance on Russian natural gas, reduce Ukraine’s role as a transit state, and potentially be a source of increased leverage for Russia.

The US topped the list of Turkey’s LNG suppliers in February of this year, according to BloomberNEF data. While analysts caution these stats are likely to fluctuate because of the seasonality of Turkey’s demand, it is certainly encouraging. With US LNG accounting for just 12pc of Turkey’s total LNG imports in 2019, there is significant room to grow volumes further. 

The Covid-19 pandemic has led to the delay of projects worldwide and is forcing big energy players to rethink their strategies. For US LNG producers, this means proactively redirecting their priorities to markets that are still open to their supplies during the global shutdown. Incidentally, all of this could lead to important geopolitical shifts in the industry that are also well worth watching. 

David Kahn is the chief investment officer of Valkor Energy, a Houston-based independent oil and gas processing and production company.

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