The U.S. Is Transforming The Global Liquefied Natural Gas Market

Cheniere Energy recently celebrated loading its 100th LNG export cargo to nearly 20 countries from Sabine Pass in Louisiana, the first such facility in the contiguous U.S. Now at over 2 Bcf/d and with five additional export terminals expected by 2020, the U.S. could be exporting 10-12 Bcf/d of LNG, or about 15-17% of our total current gas demand.

A quantum leap from the zero we were exporting in January 2016.

Now 85% complete and expected online in Q4, Dominion Cove Point in Maryland will be our first LNG export facility on the East Coast. Dominion recently asked FEFC for approval to introduce fuel gas at the plant. Fully subscribed under 20-year terminal service agreements, the $3.8 billion Cove Point will have the capacity to export some 0.8 Bcf/d, ready to weaken Russia's stranglehold on Europe.

Yet, with the Panama Canal's expansion in June 2016, Sabine Pass can reach any major import terminal within 25 days.

Already with three fully-operational LNG trains, Sabine Pass’ fourth train is in the commissioning process and will be completed in the second half of this year. Trains five and six will come online over the next few years.

Sabine Pass has already made such a significant change in the global LNG market that gas from the Montney shale play in western Canadian is set to reach the U.S. Gulf for export to the world (here). Canada's own LNG export off the nearby BC coast is not expected until at least 2022.

For reference, it takes 37 hours to drive from Edmonton to New Orleans, slightly less than from NYC to LA.

Even though the LNG market has been oversupplied, it's good time to add LNG export capacity because it takes years for commissioning. Exporting just 1-2% of the world's LNG last year, the U.S. by 2019 will soar past 13 other exporters and become the 3rd largest LNG exporter behind Qatar and Australia.

The splash of the U.S. onto the LNG business is reverberating around the world. In short, it's helping to install a buyers gas market.  This is of great political consequence: risky Russia accounts for over 20% of all internationally traded gas.

As I note here, natural gas will be the main fuel to meet climate change goals announced at COP21, so the world needs as many democratic, transparent, and free-market suppliers as possible.

And it's the LNG that connects "distant lands separated by vast oceans" that'll make natural gas more like petroleum, a fungible global commodity where the origins of a sale are largely interchangeable.  Today, only about 30-33% of all used gas is traded between nations, compared to oil at nearly 70%.

As the global LNG market continues to evolve, buyers want flexible contracts and the ability to hedge.

The U.S. is leading the way toward destination-free, flexible LNG. Although LNG has historically been sold through long-term contracts linked to the price of oil, some 40% of the nearly 60 vessels that left Sabine Pass last year had gas sold under spot transactions. The collapse in oil prices has decimated revenues for gas exporters using oil-indexation.

On May 4, ICE will offer a risk management solution by launching the first ever U.S. LNG futures contract. The size will for 2,500 MMBtu with a monthly cash future settled against the Platts LNG Gulf Coast Marker price assessment. 

Now with Asian spot prices below $6, U.S. buyers themselves are also looking for even better conditions. Indonesia’s Pertamina, for instance, wants to alter its LNG contracts with Cheniere, now set at Henry Hub prices, plus 15%, plus a fixed $3.50/MMBtu fee.

Three of the world's biggest buyers, Korea Gas, China's CNOOC, and Japan's JERA, recently signed a MOU to coordinate demands for greater flexibility in procurement.

It's a positive market signal for smaller volumes, smaller projects, and shorter contracts to become the norm. Over the past decade, short-term contracts (less than 2 years) have doubled their share of the LNG market to about 30%.

Make no mistake though, as the market balances out in the early-2020s, the U.S. faces serious competition. Russia's $30 billion Yamal LNG in the Arctic will start exports this year, with initial sales on the spot market and moving toward long-term contracts in 2018. Yamal is 90% complete and will be Russia's second gas liquefaction plant. 

Also feeling the heat of the U.S. entrance, global LNG leader Qatar just announced that it will be lifting a 12-year freeze on development of its North field ("the largest gas field in the world") to grow export capacity. Qatar has boosted contract flexility and has low production costs.

And although now exporting nearly 20% of all LNG exports, and poised to become the largest supplier in 2019, "Everyone's a Loser in Australia's LNG Boom." Australia's worsening energy supply crisis is based on higher prices and domestic supply shortages (here).

Globally, the International Gas Union lists nearly 30 new plants under construction. 

LNG's 10-12% share of total global gas consumption can only increase. FLNG (helping exporters reach stranded gas fields) and FRSU (helping to increase the pool of LNG importers) are lowering costs and expanding the market. In addition, more "LNG to power" projects will increase gas utilization in poor nations, a modern fuel upping human development while lowering climate changing GHG emissions.