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US LNG- impact on global markets

By Charles Ellinas

Should the new drilling round just starting in Cyprus be successful, as expected, the most likely method to export the gas will be in liquefied form, LNG. For this reason it is important to understand what is happening to the global markets.

The increasing export of US LNG is changing the global trading landscape. And this is just the beginning. With substantially more to come, it is on the way to cause far-reaching changes similar to what US shale has done to the oil markets.

Global LNG markets

BP’s Energy Outlook 2017 forecasts that LNG supplies will grow rapidly to account for over half the traded gas by 2035, led by LNG exports from the US, Australia, Qatar, Africa and Russia. Asia will be by far the biggest destination for LNG.

In its Statistical Review of World Energy 2016, BP showed that global LNG production grew rapidly in 2016, with global supplies set to increase by a further 30% by 2020. This glut in supply led LNG prices in 2016 to drop 20%-30% in comparison to 2015 and will remain low in the longer-term.

BP’s Review also pointed out that Europe’s access to plentiful supplies of pipeline gas, particularly from Russia, means that LNG imports are facing stiff competition. Russia has the capacity to compete and maintain its market share in the face of growing competition from LNG supplies.

Impact of US LNG

US LNG exports began in February 2016 from Cheniere’s Sabine Pass facility, with 18.6 bcm/yr capacity, and have since been directed to about 25 countries worldwide. By 2019 Cheniere expects to have seven trains operational, with a total capacity of 58 bcm/yr, making the company the fifth largest LNG supplier globally.

In a recent interview Harold Hamm, chairman of Continental Resources said: “Natural Gas from the US is going to have a world impact”. And it is.

As pointed out recently by the Atlantic Council, increased US LNG availability is boosting the economic and geopolitical influence of the US in international markets. The enlargement of the Panama Canal is allowing US suppliers to transport LNG competitively to wider markets across the world.

In addition to Sabine Pass, there are another five terminals currently under construction with an estimated capacity of 73 bcm/yr, scheduled for completion by 2019.

A further four have been approved, but are not yet under construction. These will make the US the third largest LNG producer in the world, with 14% of the market, behind Australia’s 22%, and Qatar’s 21%.

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The US Energy Information Administration (EIA) forecasts that including these projects, US LNG exports could increase to over 100 bcm/yr by 2025 and further after that. LNG exports are expected to drive US gas trade.

These forecast exports are mostly based on projects that are already being planned, but there are more to come due to the ever-increasing US gas production.

More to come

The US’ huge shale potential and a deluge of new gas production, including associated gas as oil production rises, threaten to keep the US awash with excess supply and lower prices.

The North American gas market, domestic electricity production and industrial use are not expected to grow fast enough to absorb this gas. As a result, the focus is shifting towards LNG exports and the pressure to approve and construct new LNG export facilities is increasing.

Given that much of the gas is associated gas, it will need to find markets if it is not to affect oil production. Without new markets, producers are concerned they will not be able to get rid of this gas and thus may not be able to increase oil production.

It is also cheap as most production costs are recovered from oil. LNG exports provide outlets for US gas and thus help balance the domestic market and curb price volatility. Even though there is a global LNG glut, the US is already preparing for its next round of export projects.

Harold Hamm said “These exports are part of the larger picture of US energy independence…We are shipping around the world, and now with infrastructure being built…we will continue to export even more through time. This is just the beginning.”

US government support

The process has already started. So far the US Department of Energy has cleared LNG exports totalling 220 bcm/yr. If most of these projects are built, the US will become the world’s dominant LNG exporter. The EIA expects the US share of the global LNG market to increase to 20% by 2025.

This appears to have the full support of President Donald Trump, who is engineering a sharp shift in US energy policy by using energy exports as an instrument of trade policy, championing sales to China and other parts of Asia in an effort to create jobs and reduce US trade deficits.

On June 29 he said: “With these incredible resources my administration will seek not only the American energy independence that we’ve been looking for so long, but American energy dominance.”

But unleashing large quantities of cheap US LNG on the rest of the world could have a dramatic impact on re-shaping markets and keeping prices low.

As US LNG exports indexed to Henry Hub gas-pricing ramp -up, the old models of stable long-term contracts are coming under pressure and are having to change in response to what is becoming a more flexible, transparent and liquid market.

Significant new supplies from the US also reduce the market power of incumbents and increase that of the US. Through the rise of LNG, the world is moving towards a globally-linked natural gas market.

Increasingly, US LNG has the potential to have a similar effect on global gas supplies and prices as US shale is doing to oil.

US LNG will, though, face stiff completion from Qatar, which has just announced plans to boost LNG production by 30%, to 138 bcm/yr within the next five to seven years, as part of its plans to defend its market position.

This is equivalent to a third of current global supplies. Qatar’s production costs are low and infrastructure is already in place. Not only does this mean that the LNG market will not ease after 2022, as some predict, but substantial quantities of new LNG will be added at very competitive prices, keeping prices low for the longer-term.

But a word of caution

Gas is not replacing coal and renewables are rising faster than any other energy source. A number of recent forecasts show gas demand to be slowing down from the early 2030s onwards. These potential developments could lead to increasing pressure on gas with time, keeping prices low.

BP’s Energy Outlook 2017 is more bullish on gas, but it still warns that only a small part of technically recoverable resources will be consumed by 2050, with long-term implications on prices.

Clearly global energy supply and demand are undergoing permanent structural change, with renewables gaining ground and fossil -fuels retreating in the longer-term.

In such an environment, mostly cheaper resources will be able to be developed and compete, mainly in the Middle East, US and Russia. This is the environment in which East Med gas has to compete.

Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council

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