Clash of the Titans: Global #LNG Prices

Estimated Global #LNG Prices, July 2017 (Dollars per MMBtu )

With the advent of shale gas, the United States has transformed itself from a growing importer of natural gas to a burgeoning exporter. Exports by pipeline and ship have grown in the last couple of years. Liquefied natural gas (LNG) exports in 2013 were about 13 billion cubic feet (bcf), while in 2016 that figure jumped to almost 184 bcf. This increase can mostly be attributed to the opening of the Sabine Pass Liquefaction facility in Louisiana in February 2016. Despite the large volumes associated with the large-scale U.S. LNG export terminals, like Sabine Pass Liquefaction, there has also been a growing interest in small-scale LNG exports, mainly in cryogenic containers, to the Caribbean.

Global Liquefaction Capacity, 2005-2025 ( billion cubic feet per day (bcfd))

The Global LNG Market

If all the U.S. LNG export projects that received DOE, Govt of USA final approval (20.6 bcfd) were operational today, the United States would rank first in the world, by far, for global export capacity. In 2016, Qatar exported the most LNG, 3,687 bcf, or 10.1 bcfd, while U.S. LNG exports were 184 bcf, or 0.5 bcfd.

Expanded U.S. LNG exports will face competition in the global LNG market. According to one study, global liquefaction capacity is projected to rise by almost 43% by 2025. Many non-U.S. projects are further along than the U.S. projects. In 2016, LNG trade. accounted for 32% of all natural gas traded internationally. Trinidad and Tobago’s decline, starting around 2008, is mostly because the United States is no longer a big importer of LNG.

Most LNG sold in the world is under long-term contracts indexed to oil prices. Long-term contracts are needed to finance the liquefaction facilities, usually the most expensive part of the LNG supply chain, which also includes LNG tankers, storage, and LNG import terminals. U.S. natural gas prices are market-based, which can give U.S. LNG export projects an advantage because the differential with oil-indexed natural gas prices can be wide compared to the U.S. price. U.S. LNG exports could add to the pressure for other countries to delink their natural gas exports—either as LNG or by pipeline—from oil-indexed prices. Japanese companies, for example, have been vocal about their interest in a natural gas-based pricing mechanism to reduce costs and exposure to oil prices. However, recent declines in global oil prices have reduced the oil-indexed versus gas-indexed price differential.

Many of the projected projects are targeting the Asian LNG demand centers. Although the locations of most of the proposed U.S. export terminals are on the U.S. Gulf Coast and the East Coast, Asia may be the target market for U.S. LNG, as it tends to pay higher prices for its natural gas imports. The widening of the Panama Canal has contributed to U.S. competitiveness in Asia. Europe has significant LNG import capacity, but needs to continue to improve its infrastructure connections to transport gas to markets. Russia, the main supplier of natural gas to Europe by pipeline, may be put under increasing pressure by U.S. export projects to further delink its natural gas prices from oil. U.S. LNG exports could also provide options for some countries that are highly dependent on one supplier.

Between 2000 and 2008, the United States prepared to increase imports of LNG based on forecasts of growing consumption, and companies began constructing LNG import terminals. However, the rise in prices gave the industry incentive to bring more domestic gas to market, reducing the need for import terminals. The result, as mentioned above, was the development of shale gas. Imports in 2016 were 35% below their peak in 2007; consequently, there has been a push for modification and expansion of existing LNG terminals to add liquefaction capability, as well as construction of new terminals, in order to expand U.S. export capacity.

Annual U.S. Natural Gas Prices, 2000-2050 

Nominal Dollars per Million British Thermal Units ($/MMBtu)

The first large-scale LNG shipments from the continental United States occurred in February 2016 from the Sabine Pass LNG Terminal in Louisiana to Brazil, India, and the United Arab Emirates. Some in related industries believe that instead of exporting U.S. natural gas, the United States should increase its use of natural gas in the electric power sector to displace coal, as an alternative transportation fuel to displace oil, and to provide fuel and feedstock to domestic industries such as petrochemicals. Natural gas producers counter that there is enough natural gas for both domestic growth and exports. Nevertheless, some transition to natural gas is already occurring, particularly in the electric power sector, and according to the U.S. Energy Information Administration’s (EIA’s) latest annual average projections (which assume no changes in U.S. policy), prices are not expected to reach the price peak of 2008 until 2042.