American LNG Expands Globally

Under the previous US administration, the US LNG industry made cautious steps towards global acceptance. Recall that it took years for the US to finally allow Cheniere to export natural gas in 2011, a privilege extended to a few other companies since, including Cameron Energy’s site in Louisiana and Carib Energy’s plant in Florida. Just recently, current President Donald Trump has set the stage for LNG exports from the US Gulf Coast to explode.

The announcement of a 100-day action plan between the US and China is a step towards a new trade deal between the two superpowers. The action point contained within that has the US LNG industry buzzing is that it will now allow Chinese companies to directly negotiate long-term contracts with US suppliers. Fundamentally, it doesn’t change the existing rules allowing greater access for China to US gas cargoes, but it clarifies the existing structure that long-term contracts are allowed. And it opens the gate for eventual greater access. China relies on Qatar and Australia for most of its LNG imports historically.

Things are expected to change now. Most of the world’s hungriest LNG markets – Japan and South Korea in particular – obtain their LNG from long-term contracts lasting 10-20 years, with flexible price mechanisms. Immediate shortages are dealt with on the spot market, purchasing available cargoes of LNG that are floating around. For US LNG, only the latter has been available to China. The only currently operating LNG export site, Cheniere’s Sabine Pass facility, exported nine cargoes to five Chinese terminals in 2016. All were purchased on the prompt spot market, often through brokers. While suppliers often receive better prices for spot sales, they crave the dependency of long-term contracts.

Even being limited to spot sales, the US accounted for 7% of China’s total LNG imports in March 2017. And the potential to grow is vast. China’s total LNG demand in 2016 was 26 million tons, and rising fast. Consultancy Wood Mackenzie expects Chinese LNG demand to triple to 75 million tons by 2030. Current major market players like Qatar, Australia and Malaysia are well-positioned to feed East Asian LNG demand, while consumers in Japan, South Korea and Taiwan signaled this year they are prepared to radically overhaul the ways in which LNG is sold worldwide, allowing for more flexibility. WoodMac’s estimates of U.S. LNG growth potential depend heavily on American competitiveness with local regional players.

The string of LNG export projects up and down the US Gulf Coast won’t be completely dependent on China. There are gas-hungry markets in Latin America to feed. In June, Cheniere will ship its first LNG cargo to Poland. In fact, Western Europe might prove to be a strong outlet for US LNG – the drive to wean countries off piped gas from Russia has led many countries to consider LNG import facilities. Some of that supply will come from the east, like the plan to pipe natural gas from Israel’s giant Leviathan field to southern Europe, but there will definitely be a lot of space and demand for American LNG.

The current slate of American LNG projects was built under the assumption that access to China was limited. What the industry hopes now is that the new deal will trigger a second round of major LNG developments on the Gulf Coast. And if rules are relaxed even further, Chinese buyers could eventually buy-in, invest and finance the liquefaction facilities themselves, the same way Japanese and Korean buyers currently do. That would be a great bone for the American natural gas industry.

The previous time when the US was a net exporter of natural gas was in 1957, when Dwight Eisenhower was president. Times have radically changed now. In 2018, the US is expected to become the third-largest exporter of liquefied natural gas (LNG) in the world. A win for President Trump, boosting industry growth as he faces major political headwinds in Washington.

Easwaran Kanason

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