From the Editor: The extraordinary rise and rise of US LNG [Gas in Transition]
Qatar, long dominant as the world’s largest LNG exporter, lost its crown to Australia last year by the slimmest of margins, according to BP data, but both look set to be surpassed by the US as early as the end of next year.
The US Energy Information Administration (EIA) estimates that with the completion of new projects under construction and upgrades at existing plants, US liquefaction capacity will reach 118bn m3/yr (11.4bn ft3/yr) by end-2022, with peak capacity of 144bn m3/yr, compared with Australia’s 118bn m3 and Qatar’s 106.5bn m3.
The rise of US LNG has truly been extraordinary as the country’s first major export facility was only completed in 2016.
Moreover, track back a little more than a decade and the US was a significant importer of the fuel and set to become a much larger one. LNG was the medium by which the US would become a gas-import dependent country, in addition to its addiction to foreign oil, a scenario which raised a host of foreign policy issues.
The US invested massively in regasification capacity which was barely used, but every cloud has a silver lining. The regas terminals became the basis for a new LNG export industry by providing multiple, brown-field sites hosting billions of dollars of redundant infrastructure which could be usefully repurposed. This sunk investment, although not the only factor, gave the US an edge in terms of both cost and timescales in bringing new LNG projects onstream.
None of this, of course, would have been possible without the technological vision of the US’s pioneering shale companies. Shale drilling turned the gas industry on its head, moving it from looming deficit and import dependency to a present and future of abundance. From 2007, when US LNG imports peaked at 21.5bn m3, equal to 10% of the then global market, US domestic gas production, already the largest in the world, increased by 75% to 915bn m3 in 2020.
This has underpinned a huge increase in pipeline exports to Mexico, a big improvement in the US’s gas trade balance with Canada, a massive expansion of domestic gas use – the most important element in reduced US use of carbon-heavy coal in the power sector – and the emergence of a new industrial sector, LNG exports, now on the cusp of becoming the world’s largest.
Moreover, US LNG exports have had a global impact. Rising security of supply has encouraged countries facing gas supply deficits to enter the LNG market, when the alternative backstop would almost certainly have been coal.
Europe, long struggling to address falling domestic production and rising dependence on Russian gas imports, often with grandiose pipeline projects stretching into Central Asia, the Middle East or far down the coast of West Africa, has been provided with a secure and less expensive alternative.
In Asia, coal-dependent China and India have both proved willing buyers of US LNG as both have ambitious targets to increase gas use in their energy mixes, but lack the domestic resources or, particularly in India’s case, acceptable pipeline import options.
US LNG has also played a key role in the globalisation of gas markets, providing a price transmission mechanism between the world’s largest gas system and regional markets in Asia and Europe.
This is maturing through the development of marker prices, futures markets and derivatives to provide a more transparent and robust global gas market able to react to price signals and focus investment where it is needed.
US capacity growth is coming from the expansion of existing facilities and construction of new ones, but there are many more viable projects waiting in the wings. Sabine Pass saw the start of Train 6 in late November and both it and the Corpus Christi LNG plant have been undergoing optimisation, which is expected to increase capacity by 10% and 14% respectively.
However, the biggest leap in capacity will be from the Calcasieu Pass LNG plant in Louisiana, comprising nine blocks each with two mid-scale modular liquefaction units. On completion of all units, expected by fourth-quarter 2022, Calcasieu Pass will add 16.5bn m3/yr of capacity.
The US will then have a total of seven LNG export facilities and 44 liquefaction trains, ranging from large to small-scale. This will be augmented in 2024 with the expected completion of Golden Pass LNG, bringing total US capacity to 168.5bn m3, representing just over a third of the world total based on 2020 demand of 488bn m3.
Moreover, according to EIA data, the US Department of Energy has approved a further ten export projects, including capacity expansions at existing plants Cameron, Freeport and Corpus Christi, some of which could see final investment decisions next year.
West Coast failure
But if there is one gap in the industry’s expansion, it is the failure of West Coast LNG projects, a reality underlined in November by the announcement that the Jordan Cove LNG plant in Oregon had been shelved. In a filing to the US federal regulator, Canadian developer Pembina Pipeline said the denial of several state permits and authorisations had prompted it to not move forward with the project.
As a result, US LNG plants are clustered on the Gulf Coast, with two, Elba Island in Georgia and Cove Point in Maryland, on the East Coast, providing easy access to Atlantic basin markets, but much longer transit routes to the Pacific. Golden Pass is also located on the Gulf Coast.
This makes US LNG uniquely dependent on passage through the Panama Canal to access the dynamic LNG growth markets of Asia. The Panama Canal, despite its expansion, is a chokepoint, where congestion and delays have already made their impact felt on short-term market dynamics.
This failure has also allowed competing projects to progress, although one, Sempra’s Costa Azul plant on Mexico’s west coast, is to all intents and purposes an extension of the US gas system. The other competitor is LNG Canada, which is sited on Canada’s west coast at Kitimat, British Columbia.
Costa Azul will have a capacity of 3.3mn mt/yr (4.5bn m3/yr) and is expected to start production at the end of 2024. LNG Canada will have a capacity of 14mn mt/yr from two trains and is expected to begin operating in 2025. Shipping times from Kitimat to Asia are about half that from the Gulf of Mexico and avoid the Panama Canal.
Asian demand growth
According to Morgan Stanley, global LNG demand is expected to grow by 25-50% by 2030. This will require 73mn mt/yr (99bn m3/yr) of new projects. The key markets driving growth will be China and India, followed by Taiwan, Thailand, Bangladesh, Indonesia and Malaysia.
As a result, trade flows from the US to Asia are likely to grow and spot pricing will increasingly be influenced by the width of the US-Asia arbitrage. The US LNG sector will certainly benefit as a whole, but it will be Canada and Mexico’s west coast plants which look likely to book the biggest margins as Gulf Coast trade sets the spot price.