LNG is the world's fastest growing traded commodity. It's the driving force behind the globalization of natural gas, the most important energy source in the world's goal to lower CO2 emissions, support renewable energy, and provide modern energy to a mostly poor world. Given the surge in U.S. gas production, and the inevitable surge in our own LNG exports, we Americans must perpetually better understand this market.
In the first half of 2017, global LNG demand increased 12% and is now closing in on 40 Bcf/d (~305 million tonnes), or about double what the entire Marcellus shale play produces. The fact is that the LNG market can only continue to grow, projected to rise another 20 Bcf/d or so by 2025 alone.
As I show here, the main gas market impact for Hurricane Harvey was "demand destruction," a horrific storm that not just lowered the need for gas-fired electricity but also drastically reduced our piped gas exports to Mexico and shipped LNG exports to the world. Deadly high water levels at Texas and Louisiana ports shut shipping lanes and terminal access across the Gulf.
And it's vital to note that Sabine Pass in Louisiana is no longer the only LNG feedgas market that gets reported. "Cove Point cleared to introduce feed gas," and the Maryland facility should be exporting by the end of this year, eventually having the capacity to ship out 0.8 Bcf/d - although just a third of Sabine Pass.
In future, Gulf storms will be increasingly bearish for gas prices because it's the hub of our rapidly growing gas export boom, where shut-in exports mean lower prices. Take LNG. In the U.S. alone, there are six LNG export projects under construction, with another three fully permitted but waiting for that all-important final investment decision. And there are another 12 such projects with 25 Bcf/d of sendout capacity in the queue at FERC, which now has quorum reinstalled to improve big projects.
Again, with 700-800 trillion cubic feet of gas that can be produced at $3/MMBtu or less, the U.S. could become the largest LNG exporter before within a decade.
The LNG boom now faces the gaining influence of huge commodity trading houses, namely, Swiss firms Vitol, Glencore, Gunvor, and Trafigura - ranked in order as four of the world's top seven commodity traders. These nimble behemoths are changing the business that was long dominated by Western oil majors and state energy producers that have sold LNG directly to consumers on large quantities and long-term contracts.
For now, traders will help the traditional LNG producers by finding new buyers in emerging markets, easing a glut that is pressuring margins. But ultimately, these and other traders have set their sights on supplying not only the fastest-growing Asian consumers, like China, India, Bangladesh, and Pakistan, but also the traditional largest buyers, such the power utilities in Japan and South Korea. "Buyers in Asia are boosting use of the fuel at a “staggering” pace, Jack Fusco, CEO of Cheniere Energy."
The big buyers are indeed mostly locked into long-term deals but many of those contracts will soon be ending. The commodity traders promote their ability to offer greater liquidity, flexibility, and efficiency. Rapidly emerging and disruptive LNG technologies like floating terminals are lowering costs, growing flexibility, expanding the importing pool, allowing traders a route into new markets, and absorbing the LNG surplus.
After long being an exclusive club due to high costs and rigid contracts, the LNG business is shifting toward a more customer-focused market that's installing gas as a more fungible global commodity, sold like petroleum (here). Over the next 12 years, the global pool of LNG importers will boom by 75% to over 70 nations.
And in June, the Japan Fair Trade Commission’s conclusion that LNG destination clauses - which greatly restrict resales to third parties - are anti-competitive is another move toward a more flexible global LNG market: "The Shift Away from Take-or-Pay Contracts in LNG." Not to mention that, naturally, the influence of oil-indexed pricing will continue to fade. Widely seen as the future of the business, the short-term LNG sales that buyers covet are a rising 30% of all demand, and smaller sale volumes are increasingly wanted. "The rise of the LNG portfolio players."
Given low prices and oversupply, there’s been a real dearth of new LNG investment decisions being taken on, so the market will be tightening within five years or so. The glut is squeezing those exporters needing customers and financing. Current capacity greatly outstrips demand. In 2016, global LNG trade was 260 million tonnes per annum, but liquefaction capacity was 340 million tonnes per annum. This market, however, is slowly shifting, and in the first part of the next decade many current contracts are set to expire, with locked-in volumes continually decreasing.
This all is opening up new opportunities across the entire LNG business. Demand creation via marine fuel (bunker), LNG-to-power, and vehicle use will be increasingly critical. From an environmental standpoint at least, these are all to be encouraged, because gas emits far less greenhouse gas emissions than the fuels it displaces.
Even though spot LNG prices have collapsed to $5 or even below from $12 or $15 a few years ago, current LNG investment makes sense. It's a long race, and low prices themselves are locking in gas demand infrastructure. There are now even signs that: "The Giant Gas Glut May Not Be So Giant After All." By the early-2020s, prices are destined to be higher as demand mounts, and the supply gap widens.
As for the fastest growing LNG supplier, the call on added capacity from the U.S. could be 60-70% of new demand by 2025. Ultimately, demand growth though could be even faster-than-expected to materialize. So, LNG investors should know that eventually their LNG supply will be required: as I have already shown here, natural gas is the future. Price wise, the rise in LNG supply coming online over the next few years should lead to a global convergence of gas pricing based around the U.S. market and Henry Hub.
