The Fuse

When it Comes to U.S. LNG Exports, Don’t Believe the Hype

by Nick Cunningham | June 19, 2015

When Cheniere Energy completes the construction of its Sabine Pass liquefied natural gas (LNG) terminal in Louisiana—expected by the end of 2015— and ships out its first LNG cargo, it will mark a new era for U.S. energy. More projects are to follow, but the expectation is that in the relatively near future, the U.S. will become a major exporter of natural gas.

Cheap natural gas presents an opportunity for producers to ship their product abroad, where natural gas can easily command prices two or three times as high as those found in the United States.

There are about two dozen proposed LNG export terminals in North America, with many more on the drawing board, each trying to move as quickly as possible through the regulatory process to hit the market sooner than competing projects.

north american lng

That is for a good reason. Many, if not most, of the projects will not move forward, because the global market for LNG is simply not big enough to handle all the capacity.

In fact, despite the hype over the last few years surrounding the export opportunity for U.S. natural gas producers, LNG markets are looking remarkably weak.

The Arbitrage

Fukushima-Daiichi nuclear meltdown caused a spike in Asian LNG prices, which do not enjoy the level of liquidity seen in other energy markets, such as oil or coal.

In the aftermath of the Fukushima-Daiichi nuclear meltdown, caused by the devastating 2011 tsunami, Japan scrambled to import many forms of energy including coal and natural gas to compensate for the lost power generation capacity from 54 shuttered nuclear reactors. This caused a spike in Asian LNG prices, which do not enjoy the level of liquidity seen in other energy markets, such as oil or coal.

The Platts Japan/Korea Marker (JKM), a benchmark for spot LNG prices in East Asia, soared in the years following the disaster. JKM prices hit a peak in early 2014, touching $20 per million Btu (MMBtu). With U.S. Henry Hub prices trading between $2 and $6/MMBtu in the years following Fukushima, energy companies were eager to take advantage of this enticing arbitrage opportunity.

Back to Reality

JKM prices have fallen by more than half since then. There are a few reasons for the collapse. China’s economy is growing slower than at any time in recent memory. JKM prices usually rise during winter months, but a milder winter in Asia kept a lid on demand in 2015.

However, there are two larger reasons for the dramatic decline in LNG prices: The collapse in crude oil prices, and the increasing volume of LNG supply.

LNG prices have traditionally been linked to the price of oil. The bust in oil markets pushed down prices for spot LNG cargoes.

More importantly, global liquefaction capacity has risen rapidly. ExxonMobil added nearly 7 million metric tonnes per annum (mtpa) of new capacity last year from its Papua New Guinea LNG project, which came online quicker than expected. At the end of 2014, BG Group shipped out the first cargo from its Queensland Curtis LNG project, a massive liquefaction terminal that turns coal seam gas into LNG for export to China.

Spot prices for JKM fell to $7.60/MMBtu for July 2015, a decline of more than 41 percent from a year earlier, and nearly a third off from its 2014 peak. The low price level could be temporary, but after factoring in the cost of liquefaction, transport, and regasification, there is a pretty small profit margin for exporting gas from American shores.

The U.S. will contribute an additional 44.1 mtpa by 2020, enough to put it in third place behind only Australia (80.9 mtpa) and Qatar (77 mtpa).

That is just the beginning. A tidal wave of new LNG projects are set to hit the market in the next few years. Global liquefaction capacity stood at 301 mtpa by the end of 2014, only slightly up from years past—but that is about to change significantly. Australia alone is set to add 58 mtpa by 2017. The U.S. will contribute an additional 44.1 mtpa by 2020, enough to put it in third place behind only Australia (80.9 mtpa) and Qatar (77 mtpa). Worldwide, LNG export capacity will jump by 40 percent to 423 mtpa by 2020.

lng capacity

But the ambitions of U.S. companies far surpass what is feasible. As of the first quarter of 2015, the backlog of proposed terminals reached 269.6 mtpa. In other words, if all the terminals that are currently proposed in the U.S. were actually constructed, it would nearly double the world’s entire 2014 liquefaction capacity. Clearly, most of these won’t move forward.

Where Will Demand Come From?

Japan has been the main driver of LNG demand. It was the largest importer of LNG even before the Fukushima disaster, and today accounts for more than one-third of total LNG imports worldwide.

Despite its large appetite for LNG imports, Japan won’t be the growth market of the future. LNG imports have plateaued as the surge in imports post-Fukushima is already baked in. Looking forward, a larger problem for LNG exporters sits just over the horizon: Will Japan return to nuclear power?

In the face of public opposition, the government of Prime Minister Shinzo Abe has pushed for a restart of several reactors, a campaign that is inching closer to becoming a reality. The Japanese government has also laid out a long-term strategy that envisions nuclear power making up 20 to 22 percent of Japan’s electricity generation, up from zero today. That would result in a significant reduction in LNG demand.

China, then, presents the largest growth opportunity. The central government is seeking to reduce air pollution and switch off some of its coal-fired power plants. China also hopes to see a peak in its greenhouse gas emissions in the near to medium term, and LNG can help the government achieve those goals.

Although China presents the largest growth opportunity in LNG markets, the country’s level of demand has disappointed.

Still, China’s level of demand has disappointed. According to the International Gas Union, China only utilized 59 percent of its import capacity in 2013, a level that fell to 51 percent in 2014. Some of that has to do with new terminals coming online, but China has yet to turn into a colossal importer of LNG in the way that it has with so many other natural resources. Additionally, China is working hard to increase its own domestic natural gas supply from both onshore hydraulic fracturing and offshore production, which could dampen import demand if successful.

Is LNG the Future?

Some of the largest energy companies are very bullish on natural gas. Many expect that by the 2030s natural gas will surpass coal to become the world’s second largest source of primary energy demand. That sentiment was what drove Shell to purchase BG Group, a major LNG player.

That all may be true. But in the near to medium term there will be a lot of uncertainty for LNG. The LNG terminals already under construction, for the most part, have signed up customers under long-term contracts, reducing risk to market swings.

But the flood of export terminals coming online will keep the spot market—which accounts for one-quarter of LNG trade—well supplied. As a result, LNG spot prices could remain relatively low for the rest of this decade. The long list of LNG export terminals under consideration that have not secured buyers may not move forward. Once the current construction wave is completed, a new round of export terminals could be put off until sometime in the 2020s.

For all the hype over LNG exports from North America, the phenomenon may not be quite as big as many anticipate, at least for the next few years.


  1. Susan Sakmar says:

    While I agree that not all of the proposed US LNG export projects will materialize, there currently is about 15 Bcf/d under contract. Cheniere’s two projects (Sabine and Corpus Christi) will take about 10% of currect US nat gas production. Assuming US supply can keep up with the huge volumes LNG exports will need, I predict the US will become the world’s largest LNG exporters in the next decade.