Perhaps the biggest threat to the growth of U.S. LNG exports involves the trajectory of domestic natural gas prices, a Cheniere Energy Inc. executive said at an industry meeting in Houston.
A key selling point by terminal developers to buyers in Asia has been how abundant and cheap U.S. shale supplies are, giving them an edge over other exporting countries and long-term stability in the marketplace.
During the Texas Independent Producers & Royalty Owners Association's annual convention, Corey Grindal, senior vice president of gas supply for Cheniere, said sub-$3/MMBtu gas is the sweet spot the U.S. needs to maintain to keep its advantage and support new liquefaction capacity. At that price level, shale gas is economic for producers to lift and for end users such as LNG facilities to liquefy and to export at a solid margin, he said.
"Our main risk [is] U.S. prices equalize or go over world prices," Grindal said.
Cheniere became the first U.S. exporter of LNG produced from shale gas when it shipped its first cargo to Brazil in February 2016. Weeks ago, Dominion Energy Inc. became the second, when its Cove Point terminal in Maryland sent its first cargo to the United Kingdom. With a handful of other terminals under construction and more than a dozen more proposed, the ability of North American operators to make money will be a determining factor in what gets built and what does not.
Forecasts presented by Grindal and Michael Cohen, head of energy markets research at Barclays, suggested that U.S. gas prices will play the role the LNG export industry is hoping for over the near term and medium term. What happens after the early part of next decade is less clear.
"When you look at the forward strip through 2020, almost every annual calendar strip is below $3 and hovering near $2.75," Grindal said. "There are a lot of economical resources at $2.75."
Henry Hub futures contracts through the balance of 2018 were trading at an average $2.77/MMBtu, and at an average of $2.76/MMBtu through 2019 and 2020, as of midday March 27 according to data from the New York Mercantile Exchange. Forecasts produced by S&P Global Platts Analytics are slightly more bullish, at $2.95/MMBtu through the balance of 2018, before averaging $2.96/MMBtu through the two years after.
Cohen said fundamentals are conducive to prices rising in the shorter term, but he expects production to increase with new takeaway capacity coming online that is tied to key shale plays. That could tamp down prices even with extra demand from LNG export terminals. "Even if we see some delays, we still think the natural gas production will overshadow the additional LNG demand that is created from these liquefaction terminals in the medium term," Cohen said.
The dearth of positive final investment decisions for new LNG export facilities over the past two years has raised questions about how many more projects the U.S. and global markets will support. Margins — the difference between the price at which LNG is produced and the price at which it can be sold at in overseas markets — are being watched closely.
Cohen said he believes $2.75 to $3.25 has the margins investors need to see for some projects to go forward. "We think there is more prospect for higher prices for LNG as we move into the 2020-2025 time frame," he said. "Generally, LNG is pretty much a boom-or-bust business."
Eric Brooks contributed to this story. Harry Weber and Brooks are reporters for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.