Shale drillers from Pennsylvania to Texas flooded the United States with so much natural gas over the past decade that prices slid to a 17-year low. With U.S. LNG starting to ship, they’re going global, with the potential to upset markets from London to Tokyo.

The U.S. began shale gas exports by sea this year and is projected by the IEA to become the world’s third-largest LNG supplier in five years. Gas will challenge coal at European power plants and become affordable in emerging markets, where prices have been high and supplies limited, according to the IEA and Goldman Sachs Group Inc.

LNG became the world’s second most traded commodity after oil last year and demand will keep growing, U.S. gas is adding to the global glut triggered by new Australian supply and weakening Asian demand. Shale is having an outsized impact on how LNG is sold, prompting spot trading in lieu of long-term contracts.

While U.S. LNG supply is still relatively small, it’s having an effect because the American contracts are flexible. Australian and other foreign processors conclude long-term agreements to send gas to specific countries such as Japan and China. Asian buyers have contracted for more than half of the U.S. supply, but they have the freedom to ship the fuel to anywhere in the world, encouraging spot trading.

U.S. LNG exports to reduce global prices

The change will weigh on low global LNG prices. The WGI Northeast Asia spot LNG price has averaged just $5 per million British thermal units this year, a premium of $2.83 over benchmark U.S. prices. Two years ago, the gap was about $10. The premium for United Kingdom futures to the U.S. narrowed by almost half to $2.16.

Asian LNG prices
Asian LNG prices

The widening of the Panama Canal is going to have an impact as well and certainly on the U.S. LNG market. The canal is now able to handle most of the world’s LNG tankers and will reduce time and costs for U.S. LNG cargoes to destinations such as Chile and Japan. This week, Maran Gas Apollonia became the first LNG tanker to pass through the newly enlarged Panama Canal after picking up a cargo at Cheniere’s terminal in Louisiana. It’s carrying the shale gas to the Far East, according to an official at Maran Gas Maritime Inc. By 2021, the U.S. may dispatch as many as 550 tankers a year through the waterway, the U.S. Energy Information Administration forecasts.

U.S. LNG exports expected to boost domestic gas volatility

Price swings in the gas market have been fairly muted over the past two years as abundant output from shale basins kept futures trading within a narrow range. That’s about to change as the U.S. boosts exports of the fuel in the form of LNG, leading to potential supply constraints in the colder months, according to EBW Analytics Group.

Comparison of US Natural Gas Storage
Comparison of US Natural Gas Storage

Booming shale production has put the U.S. on course to export more gas than it imports by mid-2017, the first time that’s happened in 50 years. That could limit supplies to domestic buyers in the winter, making the market vulnerable to price spikes when demand for the heating fuel is highest.

We’re on the cusp of a paradigm shift,” Andrew Weissman, chief executive officer of EBW, said In three to four years, “the swings in demand year over year, or month over month, or even week over week may be much greater than anything we’ve seen in the past.”

Within five years, the IEA expects the U.S. to become the third-largest LNG supplier in the world. As of July 15, the U.S. DOE had given 18 authorizations for U.S. LNG projects to export as much as 13.22 Bcf/d of gas to countries that don’t have free-trade agreements with the U.S.

This trend, along with the retirement of coal plants and increased exports via pipeline to Mexico, will make the gas market more volatile than ever before. Power generators’ ability to switch between coal and gas has kept volatility in check in the last five years, but that option may be limited in the future. Last year, coal accounted for more than 80 percent of retired electric generating capacity, according to the EIA. So far this year, 43 coal units have been shut.

“As more and more coal plants retire, that safety valve to moderate and to modulate gas price swings is shrinking very dramatically”

Natural gas inventories in the U.S. are still at risk of rising to a record before the winter, making a “hard landing” likely for prices, acroding to Teri Viswanath, managing director for natural gas at PIRA Energy Group

Think global…act local

Between 2000 and 2012, liquefaction capacity more than doubled, driven primarily by the series of massive LNG developments in Qatar and the early Australian developments.1 The first wave was dominated by Algeria, Malaysia and Indonesia, which still collectively accounted for more than 60% of total LNG capacity as recently as 10 years ago, but which are expected to drop to about 20% of total capacity by 2020. The second wave has been dominated by Qatar and Australia, which have been rising rapidly from about 20% of global LNG capacity in 2000 and are expected to account for about 50% of total global capacity by 2020.

Egypt, Jordan, Pakistan and Poland all became LNG importers last year for the first time. Indonesia’s Arun terminal, which started producing LNG in 1977, has been converted for imports, according to the IEA.

LNG Exports

Total global natural gas demand is estimated to have grown by about 2.7% per year since 2000; however, global LNG demand has risen by an estimated 7.6% per year over the same period. After 2020, demand growth is expected to continue, albeit at a slightly slower pace as markets mature, demand shifts to more price-sensitive buyers, and some price subsidies are removed in non-OECD markets.

Global LNG demand by 2030 could, however, be almost double that of the estimated 2012 level of about 250 million metric tonnes. Japan, South Korea and Taiwan have been and are expected to remain the backbone of the global LNG market, while China and India are expected to be the biggest sources of additional LNG demand.

In emerging markets, smaller and cheaper floating import vessels have become popular. They cost $200 million to $300 million compared with $1 billion or more for larger onshore plants.

There are markets like Bangladesh and Pakistan where traditionally they would have gone with coal, but now gas can be the cheaper option, once you include the cost of new infrastructure. These energy-poor countries often with poor credit ratings turning to LNG.

References
  1. Bloomberg Brief – Power & Gas – Ryan Collins, Bloomberg News
  2. A ‘New World Order’ Is Re-shaping Natural Gas Storage – Rigzone
  3. U.S. liquefied natural gas surge shaking up global markets – http://triblive.com/business/headlines/10875496-74/gas-lng-energy
  4. https://webforms.ey.com/GL/en/Industries/Oil—Gas/Global-LNG–New-pricing-ahead—LNG-demand-growth
  5. https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iS.jn1Up6lt4/v3/-1x-1.png

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