Under the previous US administration, the US LNG industry made cautious steps towards global acceptance. Recall that it took years for the US to finally allow Cheniere to export natural gas in 2011, a privilege extended to a few other companies since, including Cameron Energy’s site in Louisiana and Carib Energy’s plant in Florida. Just recently, current President Donald Trump has set the stage for LNG exports from the US Gulf Coast to explode.
The announcement of a 100-day action plan between the US and China is a step towards a new trade deal between the two superpowers. The action point contained within that has the US LNG industry buzzing is that it will now allow Chinese companies to directly negotiate long-term contracts with US suppliers. Fundamentally, it doesn’t change the existing rules allowing greater access for China to US gas cargoes, but it clarifies the existing structure that long-term contracts are allowed. And it opens the gate for eventual greater access. China relies on Qatar and Australia for most of its LNG imports historically.
Things are expected to change now. Most of the world’s hungriest LNG markets – Japan and South Korea in particular – obtain their LNG from long-term contracts lasting 10-20 years, with flexible price mechanisms. Immediate shortages are dealt with on the spot market, purchasing available cargoes of LNG that are floating around. For US LNG, only the latter has been available to China. The only currently operating LNG export site, Cheniere’s Sabine Pass facility, exported nine cargoes to five Chinese terminals in 2016. All were purchased on the prompt spot market, often through brokers. While suppliers often receive better prices for spot sales, they crave the dependency of long-term contracts.
Even being limited to spot sales, the US accounted for 7% of China’s total LNG imports in March 2017. And the potential to grow is vast. China’s total LNG demand in 2016 was 26 million tons, and rising fast. Consultancy Wood Mackenzie expects Chinese LNG demand to triple to 75 million tons by 2030. Current major market players like Qatar, Australia and Malaysia are well-positioned to feed East Asian LNG demand, while consumers in Japan, South Korea and Taiwan signaled this year they are prepared to radically overhaul the ways in which LNG is sold worldwide, allowing for more flexibility. WoodMac’s estimates of U.S. LNG growth potential depend heavily on American competitiveness with local regional players.
The string of LNG export projects up and down the US Gulf Coast won’t be completely dependent on China. There are gas-hungry markets in Latin America to feed. In June, Cheniere will ship its first LNG cargo to Poland. In fact, Western Europe might prove to be a strong outlet for US LNG – the drive to wean countries off piped gas from Russia has led many countries to consider LNG import facilities. Some of that supply will come from the east, like the plan to pipe natural gas from Israel’s giant Leviathan field to southern Europe, but there will definitely be a lot of space and demand for American LNG.
The current slate of American LNG projects was built under the assumption that access to China was limited. What the industry hopes now is that the new deal will trigger a second round of major LNG developments on the Gulf Coast. And if rules are relaxed even further, Chinese buyers could eventually buy-in, invest and finance the liquefaction facilities themselves, the same way Japanese and Korean buyers currently do. That would be a great bone for the American natural gas industry. The previous time when the US was a net exporter of natural gas was in 1957, when Dwight Eisenhower was president. Times have radically changed now. In 2018, the US is expected to become the third-largest exporter of liquefied natural gas (LNG) in the world. A win for President Trump, boosting economic growth as he faces major political headwinds.
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A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions
Source: U.S. Energy Information Administration, U.S. liquefaction capacity database
On May 31, 2019, Sempra Energy, the majority owner of the Cameron liquefied natural gas (LNG) export facility, announced that the company had shipped its first cargo of LNG, becoming the fourth such facility in the United States to enter service since 2016. Upon completion of Phase 1 of the Cameron LNG project, U.S. baseload operational LNG-export capacity increased to about 4.8 billion cubic feet per day (Bcf/d).
Cameron LNG’s export facility is located in Hackberry, Louisiana, next to the company’s existing LNG-import terminal. Phase 1 of the project includes three liquefaction units—referred to as trains—that will export a projected 12 million tons per year of LNG exports, or about 1.7 Bcf/d.
Train 1 is currently producing LNG, and the first LNG shipment departed the facility aboard the ship Marvel Crane. The facility will continue to ship commissioning cargos until it receives approval from the Federal Energy Regulatory Commission to begin commercial shipments. Commissioning cargos refer to pre-commercial cargo loaded while export facility operations are still undergoing final testing and inspection. Trains 2 and 3 are expected to come online in the first and second quarters of 2020, according to Sempra Energy’s first-quarter 2019 earnings call.
Cameron LNG has regulatory approval to expand the facility through two additional phases, which involve the construction of two additional liquefaction units that would increase the facility’s LNG capacity to about 3.5 Bcf/d. These additional phases do not have final investment decisions.
Cameron LNG secured an authorization from the U.S. Department of Energy to export LNG to Free Trade Agreement (FTA) countries as well as to countries with which the United States does not have Free Trade Agreements (non-FTA countries). A considerable portion of the LNG shipments is expected to fulfill long-term contracts in Asian countries, similar to other LNG-export facilities located in the Gulf of Mexico region.
Cameron LNG will be the fourth U.S. LNG-export facility placed into service since February 2016. LNG exports rose steadily in 2016 and 2017 as liquefaction trains at the Sabine Pass LNG-export facility entered service, with additional increases through 2018 as units entered service at Cove Point LNG and Corpus Christi LNG. Monthly exports of LNG exports reached more than 4.0 Bcf/d for the first time in January 2019.
Source: U.S. Energy Information Administration, Natural Gas Monthly
Currently, two additional liquefaction facilities are being commissioned in the United States—the Elba Island LNG in Georgia and the Freeport LNG in Texas. Elba Island LNG consists of 10 modular liquefaction trains, each with a capacity of 0.03 Bcf/d. The first train at Elba Island is expected to be placed into service in mid-2019, and the remaining nine trains will be commissioned sequentially during the following months. Freeport LNG consists of three liquefaction trains with a combined baseload capacity of 2.0 Bcf/d. The first train is expected to be placed in service during the third quarter of 2019.
EIA’s database of liquefaction facilities contains a complete list and status of U.S. liquefaction facilities.