Commodities 2021: North America LNG export growth ambitions face test over emissions

Houston — North American LNG export developers may have a smaller field of potential buyers in 2021 as European utilities appear hesitant to sign new long-term commitments for shale gas amid the bloc's carbon emission reduction goals.

That wrinkle could shorten the list of projects that advance, raising the possibility of a supply shortage around the middle of the decade.

The 17 liquefaction trains across five terminals in the US, Canada and Mexico that S&P Global Platts Analytics forecasts to be online in the next five years have all been sanctioned. The forecast does not include any of the more than 16 other projects that are under active development, some of which are still proposing to start up their first trains within that time frame despite having not yet begun construction.

"It's a competitive market, and obviously it doesn't seem like there is room for everybody," said Jason Feer, head of business intelligence at Poten & Partners, a shipbroker and consultancy. "I would assume some projects may run out of runway and either be consolidated, combined with other projects, or fall by the wayside."

Surging prices in end-user markets, if they hold, would provide an incentive for additional liquefaction output from the US, the world's third-largest producer of the super-chilled fuel based on capacity, behind Australia and Qatar. Canada and Mexico also have export ambitions, mainly along their Pacific coasts due to the shorter shipping route to Asia, the biggest LNG import market.

Europe, traditionally a market that has balanced global LNG supplies, was a major long-term buyer of LNG that helped finance North America's first wave of supply from the continent. Cheniere Energy customers at Sabine Pass in Louisiana and Corpus Christi Liquefaction in Texas include French utilities EDF and Engie, Spanish utilities Iberdrola and Naturgy, and British utility Centrica.

Ultimately, the same pool of customers will be critical to the sanctioning of the second wave of North American LNG export projects.

That is why the November decision by Engie to halt talks on a potential long-term LNG supply deal tied to NextDecade's proposed Rio Grande LNG export project in Texas alarmed some industry officials who saw the collapse of negotiations as a potential warning shot that US supplies could suffer from concerns over methane emissions. Rio Grande LNG is among the projects pinning hopes to 2021 to make a final investment decision.

Market observers are waiting to see if the fizzled deal was a one-off, or a sign of things to come.

"It's definitely very different than what was being expected a year and half ago," said Erin Blanton, a senior research scholar at Columbia University's Center on Global Energy Policy.

Price surge

A positive sign has been the run-up in the Platts JKM, the benchmark price for spot-traded LNG delivered to Northeast Asia. It topped $10/MMBtu on Dec. 10, the highest level since Nov. 23, 2018 and a more than fivefold increase from its historic low seen in April. The JKM forward curve, however, is showing strong backwardation, implying the market views the current tightness as short-lived. Platts Analytics sees prices trending lower moving into the first quarter of 2021, particularly if the region experiences another mild winter, as currently expected.

On the demand side, Platts Analytics forecasts Chinese imports to increase by 18% year on year from November to March.

In India, LNG demand has been supported by COVID-19-induced maintenance and commissioning issues at domestic production fields. While production issues are expected to continue until new fields start up in 2021, incremental LNG imports will be constrained by limited spare capacity at existing import terminals, according to Platts Analytics.

That may increase the pressure on North American developers to convince European customers to sign more long-term commitments for LNG supplies.

Commercial efforts

Sempra Energy had some luck in early December, reaching an agreement for France's Total to take a 16.6% equity stake in the recently sanctioned first phase of Sempra's Energia Costa Azul LNG export project in Mexico. The deal extends Total's North American LNG portfolio, which includes interests or offtake at Sabine Pass, Freeport LNG in Texas and Sempra's Cameron LNG in Louisiana.

Extending that success to other projects in 2021 remains uncertain.

Cheniere, North America's biggest LNG producer, is cognizant of what the Engie decision at NextDecade may forebode for future contracting, and it is prepared to discuss that with existing and potential customers. The company supports US methane regulations. It is looking for a level playing field with some of its foreign counterparties or competitors, CEO Jack Fusco said in a Dec. 4 interview with Platts.

"The US is extremely transparent on our emissions profile, and it's not that way in other parts of the world," Fusco said. "I believe the US can compete effectively from a carbon emissions profile with anywhere in the world."