Falling Short: A Reality Check for Global LNG Exports
The following is the Executive Summary of the the report, Falling Short: A Reality Check for Global LNG Exports, by Leonardo Maugeri.
The next few years will likely witness the largest increase ever of LNG global export capacity. On paper, the United States, Australia, and potentially Canada and Mozambique, could be the main contributors to such an increase.
However, the growth in LNG export capacity will probably fall short of the bullish expectations of more than 200 million tons per annum (MTpa). Huge cost overruns, poor planning, changing market conditions and emerging skinny margins will likely kill many projects across the world, or postpone their materialization to an uncertain future.
The US shale gas revolution will supply relatively cheap gas for future US LNG export schemes. It will also continue to defy gloomy views of shale gas as a temporary bubble. Most pessimistic analyses on US shale so far have grossly underestimated its potential for several reasons: stale data, extensive use of models that do not take into account the rapid evolution of knowledge and technology in the shale arena, persistent under-evaluation of per-well productivity increases and decreasing drilling and development costs, and a lack of specific productivity and costs data for the different areas of an individual shale/tight oil and gas formation.
At a US natural gas price of USD 4 MBtu, a number of US LNG export projects appear to be among the most cost-competitive new LNG projects globally. This is because, on paper, they could deliver gas between USD 10/MBtu (Europe) and USD 12/MBtu (Asia), including the cost of regasification. Furthermore, the “tolling-fee” nature of US LNG plants, the absence of destination clauses in US export contracts, and the de-linking of US gas prices from oil prices, make US LNG highly attractive as well as flexible.
However, US LNG export schemes may face several hurdles, leading to Darwinian competition among them and the survival of just a few of the planned projects. In particular, prolonged lower oil prices will make US LNG less attractive internationally, while planned capacity costs will likely increase, once more projects actually enter the construction phase. Along with decreasing interest in the sector by potential financial backers, this will make later LNG schemes less feasible, regardless of the number actually authorized by the US Department of Energy. Consequently, by 2020 US actual LNG export capacity to non-Free Trade Agreements (FTA) countries will hardly reach more than 60-70 MTpa, making it difficult for the United States to have a significant impact on the different international gas markets.
Australian LNG seems to be the worst business case globally. Huge cost overruns in the last few years have made its overall cost skyrocket to USD 14-16 per MBtu (upstream plus downstream), a cost that would make most Australian LNG schemes unprofitable. The fall of oil prices could make the story even more worrisome for investors.
Nevertheless, several LNG plants are under construction in Australia, and they will come online in the next few years no matter how the market situation evolves. Owners will consider their capital expenditures as sunk costs, and will strive to cover their operating costs. Because of its high cost and destination clauses already agreed upon, Australian LNG has no outlet but the Asian markets, and it will not affect substantially the global gas market. Australian LNG export projects that are not under construction, including trains to be added later to plants already under construction, will likely be postponed indefinitely, because of market conditions.
Other newly discovered, huge gas resources in different parts of the world are unlikely to turn into LNG exports before 2020. In general terms, most of them are still awaiting actual development plans and/or final investment decisions. The current change in market conditions will further delay their materialization, adding also to the growing pressure on oil and gas companies to restore a certain discipline to their capital expenditures.
Canada will likely by the hardest hit by the new “chill wind” blowing over LNG projects. Even before the fall of oil prices, not a single planned Canadian LNG export scheme (fifteen, with a total export capacity of more than 57 MTpa) had reached a final investment decision. In particular, several unsolved problems concern British Columbia, where most of the LNG plants would be located. Those problems include strong opposition by local population to the construction of pipelines and other essential facilities, lack of basic infrastructure, environmental hurdles, shortage of skilled people, etc.
When oil prices are above USD 100 per barrel, the problems in British Columbia could make Canadian LNG projects slightly profitable – on paper. However, solving those problems could make actual costs in British Columbia much higher than planned, putting LNG profitability at risk even in a high oil price scenario. Combined with the fall of oil prices, these reasons make it highly improbable that Canada will contribute to the growth of global LNG export capacity by 2020, except perhaps for one project (Goldboro LNG).
Mozambique, another potential contributor to global LNG, still lacks clearly defined development plans with associated costs. The country’s geography, its lack of both basic infrastructure and skilled people, as well as other problems, will make overall LNG development cost a challenging factor in the current market scenario for the companies holding the major portion of the gas resources in the country. It is highly unlikely that actual LNG export plants will materialize before 2020.
Leonardo Maugeri is currently an Associate with the Geopolitics of Energy Project and the Environment and Natural Resources Program at the Harvard Kennedy School’s Belfer Center for Science and International Affairs. A copy of the full report, Falling Short: A Reality Check for Global LNG Exports, may be downloaded HERE