[NGW Magazine] US buyers take a breather
This article is featured in NGW Magazine Volume 2, Issue 11
By Ben McPherson
The new Trump administration has focused on making it easier to sell US LNG to China and other Asian markets than permitting lots more export facilities.
In an atmosphere of LNG export oversupply and stalling projects, in mid-May the US Commerce Department announced that their Chinese counterparts agreed to give state-owned companies permission to enter into long-term contracts with US LNG exporters, sending and companies scrambling.
The development came as part of the ‘US - China Comprehensive Economic Dialogue’, a framework for bilateral meetings set up in 2009 that deals with a variety of economic prospects.
While the agreement does not modify any current rules or regulations, experts say it clarifies and will accelerate LNG negotiations. Last year Cheniere Energy shipped nine LNG cargoes to five terminals in China from their Sabine Pass export facility; but these were sold on the basis of spot market pricing.
The new agreement will allow for discussions on long-term supply contracts, which has significant ramifications for infrastructure investment decisions. One analyst, Massimo Di-Odoardo at Wood Mackenzie, notes that “US LNG export terminal developers will now be able to target Chinese buyers directly, potentially helping the projects to secure financing … the deal could also support direct Chinese investment in the terminals.”
This agreement, while intriguing, is in essence a vague 100-day action plan and not a binding deal. Any co-operation between two economic behemoths like the US and China, however, is going to attract attention. China’s LNG imports in 2016 were up 32.6% year on year, at 26.1mn metric tons, according to IHS Fairplay.
Meanwhile, Wood Mackenzie is forecasting Chinese demand will hit 75mn mt/yr by 2030. Given LNG price decline (prices in Asia as a whole, the premier market, are down 56% since 2014), these numbers are exciting for US producers.
Currently the EIA predicts LNG export capacity between 2015 and 2020 will exceed demand growth by nearly 50% but new projects developed on the basis of long-term contracts could come online right at the time that glut is due to clear.
US Supply Capacity Glut
When discussing the possibility of a new series of projects backed by long-term Chinese supply contracts, analysts frame it as the “second-generation wave.” The first construction wave is coming online now, with Cheniere and its Sabine Pass facility being the pioneer. One estimate says that the ‘first generation’ will yield about 64mn mt/yr of export capacity over the next few years.
The significant projects are the fourth and fifth trains of Sabine Pass; two more Cheniere trains at Corpus Christi, Texas; three trains in Freeport, Texas; three in Cameron, Louisiana; and Dominion’s Cove Point, the one project due to be finished soon on the east coast (Maryland).
These projects are all due to come online in the near-term. Beyond them, the situation is murkier. Another set of projects have received US government approvals but are awaiting final investment decisions (FID) or notices to proceed. These include train 3 in Corpus Christi, train 6 in Sabine Pass, new projects in Lake Charles and Magnolia, Louisiana, and others.
As mentioned, LNG is a buyer’s market, with depressed prices and more export capacity coming online than import. In addition to US projects, this includes new export capacity from Australia, Malaysia and Africa.
Of course, the US Gulf Coast is (and has been) the premier location for energy development. Only Pennsylvania comes close to the region when it comes to hydrocarbon history, and the Barnett Shale in Texas was the origin of the revolution, where Mitchell Energy & Development first successfully scaled the technology for commercial shale gas production in the 1990s.
However, it US gas production growth is not in Texas or the south. Since 2012, 85% of growth has instead come from the Marcellus and Utica formations, primarily in Pennsylvania, West Virginia, and Ohio. A significant amount of this Marcellus and Utica supply is carried south through pipelines in Kentucky, Tennessee and Mississippi, to feed the Gulf export facilities.
As the sole non-Gulf Coast station, Dominion’s Cove Point LNG terminal is an interesting case study. A milestone was hit on April 7, 2017, when Cove Point received US Federal Energy Regulatory Commission (Ferc) permission to begin accepting fuel gas into the facility. Commissioning should follow in a few months. The location could provide two benefits, as they are closer both to the booming fields in Pennsylvania, West Virginia, and Ohio, and also to markets in the European Union.
In practice, however, the location is proving to be of negligible benefit. Despite being closer to Marcellus/Utica, sourcing adequate amounts of gas could actually prove to be difficult for Cove Point over the next year. The intention was to purchase Transco’s Atlantic Sunrise, a 200-mile, 1.7bn ft³/day project bringing gas from northern Pennsylvania southwards.
Unfortunately, that line has run into regulatory delays that are pushing the estimated completion date back a year, from mid-2017 to mid-2018. It gained Ferc approval in February, just before Ferc lost quorum and the ability to approve new projects, but is currently in the public comment phase with the Pennsylvania Department of Environmental Protection.
Ultimately, the often greater difficulty in permitting projects in the north, combined with the less developed infrastructure compared to that of the Gulf Coast, far overshadow the benefit of the shorter distance.
Likewise, the tantalising prospect of exports to the European Union is proving to be mostly political bluster. Many countries have expressed interest in cutting down on Russian gas supplies, particularly in eastern Europe, but deals fall through when people look at the economics. A milestone was hit this April when reports came that Poland’s state-owned PGNiG bought a June delivery spot cargo from Cheniere’s Sabine Pass, the first such heading to eastern Europe. A PGNiG spokesman even spoke of Poland turning into “a gateway for American LNG to central and eastern Europe.”
However, these proposals ignore the harsh truth of pricing: it will be almost impossible for LNG imports to be competitive with Russian pipeline gas, and the import terminals that have been built in the region are running well under capacity (see separate feature on Lithuania). Their construction might help to de-politicise Russian supplies and secure discounts, but European demand will save US overcapacity.
Gas for petchems
With these constraints in mind, the current situation could easily remain static. Recent gas price rebounds have given the industry some breathing room, after years of belt tightening and layoffs, but the oversupply of export capacity is putting the brakes on many intermediate-to-long-term LNG infrastructure projects.
With numerous US export terminal plans awaiting difficult FIDs or otherwise being delayed, it is unlikely that we will see another large development like Sabine Pass getting the green light soon. The Ferc approval process also remains a wildcard, as the agency has been without a quorum – and thus the ability to finalize regulatory approvals – for months. The Trump administration has recently announced two nominees to fill the gaps, but their confirmations will take more time.
The China announcement offers the possibility of committing to infrastructure investment that is backed by long-term contracts, but, given the vague nature of the agreement, time will tell whether this actually plays out in reality.
Further dampening expectations, cheap Russian gas will come into play there as well, as Gazprom recently announced that over 650 km of the Power of Siberia pipeline have been built. With an estimated in service date of 2019, this line will supply northeast China with gas from central Russia, and surely beat LNG prices.
Finally, if one looks at infrastructure beyond LNG exports, natural gas production expansion has fueled a remarkable renaissance in the US chemical industry. While $48.2bn is being spent on the ‘first generation’ of LNG terminals, chemical manufacturing investment from 2012 is around $160bn. Of that, $50bn have gone into projects are online or are scheduled to soon.
This includes Dow’s billion-dollar propane dehydrogenation plant in Freeport, Texas; an ExxonMobil $20bn program to expand Gulf Coast manufacturing capacity; and a large joint venture Occidental Petroleum-Mexichem ethylene plant. Pennsylvania is looking for investment as well, with Anglo-Dutch major Shell’s ethylene plant under way and other proposals on the table.
The price dynamics regarding this new demand and LNG exports, which require cheap prices to be viable, will be a key factor to watch over the next few years.
Ben McPherson