Can U.S. LNG Compete In An Increasingly Crowded Market?

The global LNG market has witnessed a remarkable period of growth and expansion where the proliferation of liquefaction technology and the rise of renewables has had a positive effect on the sector. The Covid-19 pandemic, however, shook the global economy, disrupted economic activities, and hit the LNG industry hard. With vaccination programs advancing in most industrialized countries, economies are carefully reopening and demand for commodities such as natural gas is on the rise again. Ever since fracking technology was applied on a massive scale in the U.S., oil and natural gas production has soared, driving an increase in LNG exports. The produced volumes following the shale boom were so large that the U.S. economy, once a significant importer, started exporting oil and natural gas. Before the Covid-19 pandemic, multiple LNG FIDs were planned for another round of expansion. As demand is rising again, several projects are advancing to secure funding. However, uncertainty remains as the U.S. LNG industry still faces many hurdles.

Nat Gas

During the past 12 months, the global LNG market has seen massive price swings. The spread of the novel Coronavirus and the ensuing economic crisis hit demand for LNG and lowered prices significantly. The sector’s luck changed again during the 2020-2021 heating season when a combination of factors, especially unusually cold weather, raised prices to extreme heights. The East Asian JKM benchmark briefly hit $32.50/MMBtu in January. 

While exporters welcome the news, importers buckled under the financial strain. The record prices in January were especially favorable to U.S. exporters whose natural gas is sold under Henry Hub-indexed prices which remained below $3/MMBtu. Competitors mostly rely on oil-indexed pricing which is currently approaching $70/barrel and has been on the rise for a while. Therefore, U.S. exporters have an advantage over their adversaries.

Although the list of project proposals awaiting FID has shortened during the past 12 months, the situation is changing and becoming favorable for the remaining proposals. According to Rystad, three to four U.S. LNG projects of the following list could receive FID: Plaquemines LNG Phase 1, Port Arthur LNG train 1, Freeport LNG train 4 Driftwood LNG Phase 1, and Rio Grande Phase 1. ICIS, however, is more skeptical regarding its outlook which reports that there has been limited progress in commercial discussions that several would-be exporters are having with customers.

Related: U.S. Oil Rig Count Soars As WTI Recovers

Despite the somewhat bullish expectation of the U.S. LNG sector, several large-scale projects have already been discontinued over the past months citing sustained uncertainty in global markets. In January, for example, NextDecade scrapped its plans for the Galveston Bay LNG project in Texas. Also, Annova LNG canceled plans for the Port Brownsville facility in Texas with a proposed capacity of 6.5 mtpa. 

Besides economics and uncertainty concerning global demand, geopolitics is also a headache for the LNG sector. Growth in the coming years will mostly come from Asia, with China being the main driver. According to Wood MacKenzie, Asia will account for 95 percent of the growth due to resilient demand, weak domestic production, and supportive policies. The political tension between Washington and Beijing could impede commercial deals as the Chinese could be wary of becoming dependent.

There are also competitors that threaten the U.S. LNG industry. For example, Novatek’s second massive LNG project in Siberia, Arctic-2 LNG, has already struck a deal with its partners. The plant is supposed to produce a massive 19.8 mtpa starting in 2023 which the partners Total, CNOOC, and Mitsui have signed a 20-years contract for.

Also, Qatar’s recent announcement to lift the self-imposed moratorium on the world’s largest gas field, North Dome, could be bad news for U.S. exporters seeking FID. Qatar Petroleum’s plans include a production expansion of 40 percent by 2026 to 110 mtpa from 77 mtpa. This move by Qatar has added to the risk factor for any parties considering a long-term investment in U.S. LNG.

Therefore, expansion remains uncertain for the short term. The pie is simply not large enough yet to justify another round of explosive growth. However, expect American companies to respond rapidly if global demand growth is rosier than expected, fueled by cheap feed-in gas from fracking.

Related posts