SHALE Oil & Gas Business Magazine
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It’s no secret that U.S. natural gas production, led by the shale boom, is at record highs. In fact, gas production is currently running more than 5 billion cubic feet per day (Bcf/d) higher than it was a year ago. The U.S. is now the world’s largest natural gas producer, accounting for almost one-fifth of global output. But despite the increase in natural gas usage for power generation, manufacturing and chemicals in recent years, demand for gas in the U.S. is relatively flat and will remain so in the coming years. Those two forces, robust production and flat demand, don’t bode well for prices. The solution for U.S. producers is exports.
The U.S. has actually been exporting LNG for decades. In 1969, Phillips Petroleum Co. began exporting gas produced in the Cook Inlet region of Alaska to Japan via its Kenai LNG plant. Those exports were fairly constant, with more than 1,300 shipments, until recent years. For the country at large, however, importing LNG was certainly the story for decades, with regasification facilities at Everett, Massachusetts; Cove Point, Maryland; Elba Island, Georgia; and locations in Louisiana and Texas serving to provide fuel for peak shaving. However, in the early 2000s a greater share of U.S. electricity generation capacity moved to natural gas-fired units, creating concerns about access to adequate baseline electricity generation.
At the same time, North American gas production began to decline. Imported natural gas was seen as critical to future U.S. energy needs. More than 30 LNG regasification facilities were on the drawing board or in some stage of planning. Policymakers feared that the U.S. was vulnerable to not only a cartel of oil exporters, but also a cartel of gas exporters.
The advent of the Barnett Shale play and the shale revolution changed everything. U.S. gas supply grew at an enormous rate, putting downward pressure on prices. Some of this supply was utilized to support new manufacturing projects and chemical plants. Several pipeline projects were commenced to bring U.S. gas to Mexico for power generation and use in its manufacturing sector. And companies began to look at LNG exports as another option. In a few short years, the U.S. went from looking at dozens of LNG import/regasification facilities to potentially dozens of export/liquefaction facilities.
Some facilities that had been importing LNG were now applying for permits to export it. They began a long and complex process for receiving authorization from the Federal Energy Regulatory Commission (FERC) and the Department of Energy, with export permits for non-free trade agreement countries being the most difficult to obtain. As companies sought permits for dozens of projects, a queue developed at the Department of Energy during the Obama administration that served as a bottleneck for permit issuance.
One of the earliest applicants for an export license was Cheniere Energy, which applied for an export permit for its Sabine Pass liquefaction facility (Cameron Parish, Louisiana) in September 2010 and received its final approval in September 2012. The facility, currently operating three LNG trains, will eventually have six trains operating, each capable of producing 4.5 million tonnes per annum.
This ushered in a new era of LNG exports. Cheniere’s first cargo left Sabine Pass on February 24, 2016, and landed in Brazil. Since then, Cheniere has shipped more than 210 cargoes containing more than 750 trillion BTUs to 25 countries across the globe.
The arrival of the Trump administration ushered in a strong endorsement of energy export projects, which is a central element of the energy dominance effort. The administration has been pursuing ways in which it can improve the permitting process and is actively working with foreign governments to create export opportunities. It sees LNG exports, along with crude oil, refined products and chemicals exports, as a way to immediately address the U.S. trade deficit. In early November, U.S. crude oil exports hit an all-time high at 2.13 million barrels per day.
China, India and South Korea are seen as the largest potential buyers of U.S. LNG, and President Trump and Chinese President Xi Jinping announced a trade agreement on Trump’s trip to China in November. Japan is also a big potential buyer and an interested investor in U.S. LNG capacity and related infrastructure. There will certainly be other potential suitors. According to the International Energy Agency, global gas demand is going to increase by 1.6 percent annually for the next five years.
All of these factors are making an impact on geopolitics, as the U.S. becomes competitive with Middle Eastern gas for global markets and with Russia for gas sales to Europe. LNG has now been delivered behind the former Iron Curtain to Poland and Lithuania. U.S. cargoes are even going to the Middle East. What seemed impossible a few years ago is now true: The U.S. is now competing with the Middle East in the global gas export market.
At the same time, this trend is entirely dependent on a continued low-cost supply of U.S. natural gas production from shale plays and other sources. The U.S. is currently the third largest LNG producer, behind Qatar and Australia. However, the economic advantage of U.S. natural gas, which can be produced for as low as $1/MMBTU, coupled with increased political uncertainty in the Middle East, bodes well for the future of U.S. LNG. It is highly likely that the U.S. will become the world’s largest LNG exporter in the not-too-distant future.
In fact, the Energy Information Administration predicts that by the end of 2021, at least four more export terminals will be in operation capable of delivering more the 9 trillion cubic feet per year. There are currently 11 projects under construction, with six approved and awaiting construction. When the first wave of LNG export facilities are completed, the U.S. will be capable of exporting about 12 percent of its natural gas production. If all of the facilities that are being planned were built, they would have the capacity to meet 100 percent of current global LNG demand, making it highly unlikely they will be built.
In order to support the surge in growth, LNG producers are going to need to find new and creative ways to finance projects and sell their product. Traditionally, LNG projects have been largely financed by the buyers who have willingly entered into a long-term contract of up to 30 years. That situation is changing. Future projects will require more risk assumed by the producer and will hinge on a mixture of shorter-term contracts and a growing spot market. Currently, about 5 percent of LNG is sold on a spot basis or short-term contract. Many analysts are doubtful that the market will support a significant spot market.
The next big shoe to drop is Dominion Energy’s Cove Point LNG facility near Lusby, Maryland, which was scheduled to begin producing LNG for exports as 2017 came to a close. The facility, which was originally an LNG import facility but is now fitted and licensed for export, is connected to natural gas produced in the Marcellus Shale. Cove Point will provide Marcellus gas with an important export market for decades to come. Several LNG facilities at various stages of development on the Gulf Coast will serve a similar purpose, providing a relief valve for U.S. natural gas production and an important mechanism for ensuring future growth of U.S. shale plays.
About the author: Jack Belcher is Executive Vice President of HBW Resources and consults for energy and transportation clients on government relations, regulatory affairs, situational risk management, coalition building and stakeholder relations. He is also Managing Director of the National Ocean Policy Coalition. Previously, he was Staff Director for the U.S. House of Representatives Subcommittee on Energy and Mineral Resources.
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