The U.S. liquefied natural gas (LNG) sector continues to surprise. Even for an industry that has weathered significant strategic shifts over the last decade, recent developments have been particularly dynamic.
Over the past five months:
- The first cargo of LNG produced in the lower 48 states departed from the Sabine Pass terminal in Louisiana, not long after the corporate ouster of the chief executive behind its genesis.
- The Federal Energy Regulatory Commission (FERC) rattled some investors by issuing its first denial of an LNG export project – that of Jordan Cove LNG – but then approved the application of another relatively un-contracted export project, Magnolia LNG.
- At least two LNG export projects under development have been publicly cancelled or indefinitely suspended, including one of the very few proposed West Coast projects.
- Industry leader Shell consolidated its position in the U.S. LNG market by absorbing BG Group.
- The U.S. Congress moved closer to adopting legislation mandating the U.S. Department of Energy to act on exports of LNG to non-free trade agreement countries within a short period of time following completion of an environmental analysis, which would eliminate some regulatory uncertainty.
At the same time, global economic trends are dampening the near-term prospects for LNG. A sustained decline in oil prices has sharply reduced the arbitrage opportunities between the U.S. and Asia, as spot prices for LNG in Asia are at their lowest levels in many years. A large and growing imbalance in supply and demand is expected to plague the global LNG market until at least the end of this decade. Meanwhile, nearly 60 million tonnes per annum of production capacity is under construction at six U.S. export projects, all of it expected to become operational by 2020. A further 20 export projects are under development in the U.S. and have entered the regulatory process at FERC or United States Maritime Administration (MARAD), as applicable.
Outlook for Further Projects
While skeptics are questioning whether the era of new LNG liquefaction capacity in the U.S. is over, U.S. LNG export projects should over the longer term have a competitive advantage in a low price environment. For example, U.S. LNG export projects remain some of the least expensive liquefaction projects in the world on a cost per tonne of production basis—while U.S. projects in construction or planned will cost anywhere between US$550-US$1,000 per tonne of production per annum, most projects in Asia range between US$2,000-US$4,000 per tonne of production per annum. U.S. projects also benefit from security of supply, supported by a large, robust and liquid gas market, and a relatively favorable and predictable legal environment. U.S. suppliers also offer buyers significant contractual flexibility, and in particular the absence of (contractual) destination restrictions is U.S. sale and purchase agreements may become increasingly important; over 30 countries now import LNG and that number is expected to grow as additional developing markets embrace LNG as a reliable source of energy.
As global demand eventually returns and accelerates during the next two decades, logic dictates that increases in production should come in large part from U.S. suppliers. Those developers who take a long-term perspective and capitalize—through technology, design, or otherwise—on the fundamental benefits and efficiencies of their domestic market should emerge in a second, perhaps smaller wave of successful export projects.