Cheniere Energy’s shipment turns US into gas exporter
Momentous step for US energy industry that is marred by poor LNG pricing amid oil rout
The Energy Atlantic, a 290-metre tanker steaming slowly through the Gulf of Mexico, is about to make history. It is scheduled to arrive on Tuesday at Cheniere Energy’s Sabine Pass liquefied natural gas plant on the coast of Louisiana, to be loaded with the first cargo of LNG to be exported from the “lower 48” contiguous states of the US.
The shipment is a momentous event for energy markets, marking the arrival of the US as a gas supplier to the world.
The plunge in oil prices since the summer of 2014 has dragged down the value of LNG, which is often sold on crude-linked contracts, and damped the excitement over US exports. The economics of shipping gas from the US were compelling two years ago, but are now marginal. Deteriorating market conditions have put the brake on any new investments in US LNG.
Even so, US LNG exports are likely to have a significant impact, holding down energy costs for consumers in Europe, Latin America and Asia. They will also provide tough competition for anyone hoping to build rival LNG plants, such as the proposed projects in east Africa, the west of Canada, or Russia. By the end of the decade, the US is likely to be the world’s third-largest exporter of LNG, after Qatar and Australia.
Combined with the new supplies from Chevron’s huge Gorgon and Wheatstone projects in Australia, which are scheduled to come on stream this year, exports from the US are making it a buyers’ market for LNG.
“There is an awful lot of LNG sloshing around the world at the moment, with even more to come,” says Frank Harris of Wood Mackenzie, a consultancy. “And that is putting downward pressure on prices.”
A decade ago, this prospect seemed wildly unlikely. US gas production was in decline and by the 2010s the country was expected to be a large importer of LNG, not an exporter.
The shale revolution, the result of advances in production techniques that made it possible to extract gas at commercially viable rates from previously unyielding rocks, meant that US production started rising again in 2006, and since 2011 it has been breaking new records every year.
Charif Souki, Cheniere’s visionary founder who was ejected from the company at the end of last year, was one of the first to see the potential for LNG exports from the US. In 2010, he submitted the first application to regulators to convert the LNG import terminal that Cheniere had built at Sabine Pass, which was being barely used because US domestic gas production was so strong, into a liquefaction plant.
Many in the industry were sceptical that the project could be made to work but the plan took a decisive step forward in October 2011 when Britain’s BG Group signed a 20-year contract to buy most of the production from Sabine Pass’s first “train”, as LNG production units are known. After that contract was signed, the trickle of proposals for similar projects turned into a flood.
The US Department of Energy has received applications to export LNG for 54 projects. If they all went ahead, they would have the capacity to liquefy about 60 per cent of the entire gas production of the US.
So far, however, just five plants have started construction: Cheniere’s Sabine Pass and its Corpus Christi project in Texas; Freeport LNG, also in Texas; Cameron LNG in Louisiana; and Cove Point LNG, on the east coast in Maryland.
Those projects have been able to make progress because they were fast enough at signing up customers on long-term contracts that guarantee their revenues. Since the end of 2014 those customers, mostly utilities in Europe and Asia, have been reluctant to make any further commitments.
The price of LNG delivered in north-east Asia, including Japan and South Korea, the world’s two largest markets, has fallen along with oil. It has dropped to about $6.65 per million British thermal units, just a third of its price of almost $19 per mBTU two years ago, according to Argus, the information service.
At that price, with benchmark US gas at about $2.40 per mBTU, plus liquefaction costs of $3 to $3.50 per mBTU, plus transport at about $2 per mBTU, LNG from Louisiana or Texas does not look commercially attractive.
Similar calculations apply in Europe. Benchmark UK National Balancing Point gas has dropped by almost a half since 2013 to about $5.20 per mBTU, meaning that LNG exports from the US to Britain are unlikely to cover all of their costs.
Since 2013, most of the new LNG projects launched worldwide have been in the US. However, the deteriorating economics make it unlikely that any new plants will be approved for a while.
The plants that have already started construction, though, are highly unlikely to be stopped. This is because the companies buying LNG from one of these plants have typically made firm commitments for 20 years under which they have to pay the charges they have promised, even if they do not use the capacity.
The US LNG projects will add to global oversupply. Bernstein Research has estimated that the world’s liquefaction capacity will in the next three years rise by 90m tonnes per annum, which is about 35 per cent of present demand.
Nikos Tsafos of Enalytica, a research company, says US LNG should help hold gas prices down for a few years at least.
When the global oversupply is finally absorbed by rising demand, the next wave of plants in the US, including projects backed by ExxonMobil and Kinder Morgan, will be poised to benefit.
There are other promising potential new sources of LNG in the world, including the projects to develop large gas discoveries off the coast of Mozambique.
But those are relatively unknown quantities compared to the familiar patterns of development in Texas and Louisiana.
“If those other projects don’t happen, we can always resort to the US,” says Mr Tsafos.