US LNG Exports: A longer term perspective
While numerous headlines have been portraying the global market outlook for LNG as “very grim”, positive trends remain, according to Atlantic Council senior fellow Bud Coote. He says: “Even though gas growth demand has slowed down, it is still relevant.”
A retired CIA energy analyst with 42 years under his belt at the organisation, Coote recently authored a report entitled “Surging Liquefied Natural Gas Trade – how US Exports will Benefit European and Global Gas Supply, Diversity, Competition, and Security”.
While he concedes the LNG market grew progressively worse during the drafting of the paper, he says his main objective was to give a long-term perspective.
“Investing in LNG facilities is a long-term venture. It's going to go through several cycles, and right now the cycle is a very low one,” he says.
One source he used was the International Energy Agency's outlook report from last summer, which takes a medium-term look at the prospects: 2014-2020. “They still forecast respectable growth of overall import demand, in particular for both Europe and China.” He adds that US LNG export goals match up very well with European Union goals, which include furthering diversification, competition, and enhancing security.
“When you look around the world there are not going to be that many resources of gas that are going to be available to Europe in the next 4-5 years; most production growth is going to be in the United States and Australia.
According to the report, Australia will have a lot of LNG coming online in the next two years, but most of that will likely stay in the Asian market. Meanwhile, Norway's exports will likely to stay at a stable level, while the Netherlands will have declining production owing to regulatory constraints on production at the Groningen field; meanwhile, Algeria, Nigeria and Libya are having difficulty attracting investment owing to the market environment and unattractive terms and conditions, he says.
“That leaves Russia, which has a surplus of production and export capacity for natural gas, but it's certainly not going to do anything to diversify European gas markets. While I don't think there will be any reductions in Russian exports to Europe, the IEA is projecting relatively stable volumes of Russian gas as well, and, along with that, is projecting that Europe will need as much as 45bn m³/yr of additional LNG imports by 2020, although some of that may not occur until later because of the current glut.
Coote says the surge in US LNG exports is not likely to appear until 2018 – there's only one project, Sabine Pass, which is scheduled to start up this year. “They'll gradually build capacity through next year and beyond. We’re talking relatively small volumes that may not be more than 10-12bn m³ available to Europe by the end of 2017 from that project, and then in 2018 the surge really begins, amounting to a capacity that will probably approach 90bn m³/yr by the end of 2020.”
By the time the US surge begins in 2018, he adds, Australia's capacities should be online. “So there appears to be a window there for US LNG.”
Other projects, says Coote, which are likely to compete include gas from the Southern Corridor project, and from the eastern Mediterranean or from east Africa, projects which are not likely to hit the market before 2020.
In connection with the report, Bud Coote also fielded some questions from Natural Gas Europe.
We've heard about the contracted volumes from, say, Cheniere Energy, but within this milieu of rock-bottom oil prices, could you speak a bit about where these volumes might end up, if not in Europe?
The first shipment was supposed to go to Lithuania, but two of the major buyers from Cheniere – Engie and EDF – are both French companies with large portfolios and the fact that they're buying the LNG doesn't mean that it will go to Europe, because they also have customers in the Middle East and Asia.
As noted in my paper, there's about 30bn m³/yr that have already been contracted to European companies, but those volumes could end up anywhere. The contracts under which they are sold are variable – each one has a lot more flexibility than traditional contracts, and they vary from project to project. Cheniere has marketed some very short-term LNG and glued it to the price of hubs in Europe. That is likely to go to Europe.
Also some of the US product is sold under contracts with tolling fees, by which the purchaser has to pay a fee upfront and that becomes a sunk cost to the company, which means they can negotiate the time, the amount and the price of the sale. That makes it more attractive to the buyers, say if the price goes all the way down to $4.50/mn Btu and you've already paid $3 with the tolling fee you're much more likely to pay the other $1.50 going through with the sale instead of paying $4/mn Btu for Russian pipeline gas.
The European Commission has recognised that there is some premium that they may have to pay for LNG to have access. Contracts with US exporters helps buyers competitively with Russia and other suppliers in negotiating and renegotiating contracts. You don't need large amounts of LNG to obtain that benefit, as evidenced by the cases of Poland and Lithuania, who used to pay among the highest prices in Europe for Russian pipeline gas. Lithuania has an LNG terminal that they are barely using; Poland is still in the process of commissioning its LNG terminal, but already Lithuania has renegotiated the price of pipeline gas, which went down by 23%.
How much of a threat do you think Gazprom sees US LNG, and is there a possibility they might try to render it uneconomic?
I think there's a chance, but it would be a tough choice for them because they would be the big loser in terms of revenue because they have so much more volume than the US.
US LNG is just going to be coming out of the US in the next 2 years in small allotments, and it will be 2018 before the real surge. We don't know what the market conditions are going to be in 3 years, but that might be a more advantageous time to try it. With 10-12bn m³/yr of LNG coming to Europe from the US in the next two years and the Russians providing 160bn m³/yr, there's no question that the Russians could underprice US LNG, but it would be expensive for them considering the small amount of LNG that they're competing with.
In the next 2 years, the amount of US LNG will be equivalent to the amount of gas from the Southern Corridor pipeline, which is scheduled to deliver 10bn m³/yr of gas to southern Europe by 2020. I think Gazprom would call that “just enough for a barbecue.” So it's hard to see them robbing themselves of so much revenue.
It sounds like they'll be hit by a “double whammy” with both Southern Corridor gas and US LNG.
Yes, but import demand will still be growing in Europe. Europe's overall demand for gas is growing very slowly, but at the same time they're losing some of their domestic sources. The IEA projections for import demand growth for Europe is 70bn m³ by 2020. In other words, the demand will be 70bn m³/yr higher than in 2014. That's a pretty healthy forecast.
If more gas is coming to Europe, how do you see the prospects of spurring more of a gas economy in Europe?
Those chances probably depend on whether Europe embraces gas as part of a climate change policy. Natural gas, globally, will get a boost from the Paris climate conference, the verbal commitments to reduce carbon emissions. If government policies are actually implemented to fulfil those commitments I think that will spur gas demand, but it's going to take efforts at the national level to switch from coal-fired power to gas to produce electricity, which has largely been done in the US.
In terms of trade, how would you describe the benefits of countries without indigenous gas resources being able to purchase US LNG volumes?
It's a very positive development for such countries. It's a reliable source and, most importantly, provides leverage when you're dealing commercially with other suppliers. Politically, it's also attractive – the geopolitics are changing greatly because of it.
Domestically, how settled is the debate over whether or not the US should export its hydrocarbon resources rather than retaining them for itself?
Reports commissioned by the US Department of Energy (DOE) in 2012 and 2014 look at the economic impact on the US of exporting LNG. It was done by independent experts and concluded that exports would be overall beneficial if the US exported up to a level of about 120bn m³/y and that it could help spur US growth. This is important in influencing the DOE to approve the export projects, all of which they must approve that are intended to export to countries that do not have free trade agreements with the US. In the case of LNG, that's almost every major importer except South Korea.
In December, the DOE announced that another more recent report concludes that there would be further beneficial effects by extending exports up to 200bn m³/yr. They said the study would inform DOE policy, which means they will be inclined to continue to approve applications to reach that level. Beyond that, there's a lot of uncertainty, because all of the proposals in North America approach 400bn m³/y. A lot of those projects will have to be postponed, reconsidered or dropped with this much uncertainty in the market. But the first five have already been approved, are under construction, have their final investment decisions, and most of their output is contracted to customers. Overall, those customers have been driving the investments into LNG terminals.