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LNG's swirling sea: Export hopefuls face new year of global demand shifts

For the expanding roster of companies vying to export LNG from North America, 2017 will be a year of watching domestic policy and demand shifts overseas to see whether and when the glutted market will have room for the volumes of U.S. and Canadian LNG proposed by developers.

With incremental U.S. export capacity expected from two additional liquefaction trains at Cheniere Energy Inc.'s Sabine Pass and the coming online of the Dominion Cove Point LNG LP export terminal, developers and industry observers will be waiting to see how the long list of planned projects will fit into the global marketplace.

The list keeps growing. FERC approved Dec. 21 the Golden Pass LNG export terminal in Texas, which joins the Cameron LNG, Freeport LNG, Dominion Cove Point, Corpus Christi Liquefaction LLC, Elba Island, Lake Charles LNG and Magnolia LNG projects as having received FERC's blessing.

Though just one of Canada's several LNG projects proposed for British Columbia has received a final investment decision, export terminals like Pacific NorthWest LNG and LNG Canada would pump more volumes into the market if developers opt to move forward.

Trump, Perry and the new Congress

Not much is certain about what Donald Trump's administration will mean for LNG. Although Trump has promised an infrastructure-friendly administration, his stance on LNG exports is less definitive. The president-elect has historically opposed international trade deals, and if this protectionist agenda makes its way into the White House, the process for exporting LNG to countries lacking free trade agreements with the U.S. may have challenges. For instance, LNG companies may be hesitant to sign off-take agreements with countries like Japan, which is not an FTA country but would have been part of the Obama administration's Trans Pacific Partnership. Trump has repeatedly said he will withdraw from the 12-country trade partnership, which still has not been ratified.

Still, Trump has spoken little about the subject. During a meeting in May with coal executive Robert Murray, CEO and founder of Murray Energy Corp., Trump asked, "What is LNG?" when Murray suggested lifting obstacles to export facilities to reduce the gas supply glut in the U.S., Murray told S&P Global Market Intelligence at the time.

Overall, a Trump administration will likely be "very good for energy," said Susan Sakmar, a visiting professor at the University of Houston Law Center and author of Energy for the 21st Century: Opportunities and Challenges for LNG. "I think he'll quickly learn and be in favor of LNG exports."

One way LNG exports could get a boost is through legislation that would speed up the U.S. Department of Energy's process for approving a project to export LNG. Though the provision died along with a larger energy bill earlier in December, Republicans who favored the measure could simply wait until the new Congress to pass a bill that includes more of their agenda.

But even if that is the case, the LNG provision would do little to change the overall regulatory process because developers would still have to move through the lengthy FERC process, Sakmar said. But, she added, the measure would provide certainty to overseas buyers who may be more confident signing off-take agreements if there is a known timeline for when the DOE must rule on exports.

Trump's pick to head the U.S. Department of Energy could make speeding up the approval process for LNG exports a priority, without a mandate from Congress dictating a set timeline. Former Texas Gov. Rick Perry would bring to the office a history of supporting domestic oil and natural gas growth, which the industry hopes will translate into a desire to expedite the review process for exports.

OPEC

Global LNG prices are likely to see some movement resulting from OPEC's decision to cut oil output since many international LNG prices are pegged to oil, said Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions.

There is a growing proportion of U.S. LNG that is not reliant on long-term contracts and instead is priced depending on near-term supply and demand, Slaughter noted. It will be these volumes that could see some price increases following OPEC's production cut, since spot prices will likely be supported by oil-linked LNG contracts.

"Usually, you would expect most of that to translate into a better LNG price," he said. "What we're going to have to watch is how much the LNG pricing structure falls short of that equivalent oil price uptick."
That dampened impact, even on those contracts directly linked to oil, is due mostly to the global oversupply of LNG putting downward pressure on prices, he added.

Asia

"Major Asian buyers have signaled that, at least for now, they have reached their tolerance levels for both U.S. price and geographic LNG exposure," Barclays analyst Nicholas Potter said in a Dec. 21 note. That could change, however, if the "hiatus" in final investment decisions continues in 2017, since "more buyers may sign up for volumes from the U.S., specifically from expansion trains at currently under-construction projects," Potter said.

China and India will be important players to watch in the new year, with both countries showing potential to experience structural demand growth, Katie Bays, an energy analyst at Height Securities LLC, said in an email. "Buyers will likely be sensitive to next year's LNG demand in China and India, once again, to see if this year's import growth was a one-time event or a sustaining trend."

In China, small commercial and industrial buyers in urban areas are likely to consume more natural gas to comply with air quality regulations, boosting the country's need for LNG, she said. Still, she added, it is to be seen whether growing demand will continue to soak up excess supply or demand from China and India merely delayed oversupply into 2017.

Another development to watch will be how Japan looks to restart its nuclear fleet in the wake of the 2011 meltdown of the Fukushima Dai-ichi plant after a tsunami, said Allan Fogwill, CEO of the Canadian Energy Research Institute.

"When their nuclear generators went down, they of course started relying on other energy resources, and one of those was LNG," he said. "The question now is, if as a country they move toward bringing back a third, or half, or even all of their nuclear fleet, that's going to bring down their demand for LNG and therefore reduce the price."

That would likely take place over several years, with local opposition to restarting the fleet potentially stretching it out "much longer," Fogwill said. Still, it will be important to watch how the restart of the first few go, since it could be an indication of the future for the whole fleet.

Industry observers will continue to eye the Middle East, since proven natural gas reserves are not evenly distributed across the region, Sakmar said. "This results in an abundance of natural gas in countries like Qatar, which is currently the world's largest LNG producer, but a shortage of natural gas in other Middle Eastern countries." So far, U.S. LNG has found its way to Jordan, Kuwait and the United Arab Emirates.

Pakistan is emerging another source of potential for U.S. LNG exports, with a tender out for more imports "in the coming years," Sakmar said. "Some of the existing off-takers of U.S. LNG are oversupplied, so it's possible that some of them will re-market their U.S. off-take to countries like Pakistan."

Russia and Europe

Concern over Russia's role in supplying natural gas to Asian and European countries shows no sign of abating in 2017.

Lawmakers, industry leaders and Eastern European officials in mid-November gathered across from the U.S. Capitol to discuss the threat of growing Russian influence in the energy sphere, with Slovak Republic Ambassador Peter Kmec describing Russia's energy influence in Europe as a "monopoly."

Kmec joined ambassadors from the Czech Republic, Slovakia, Hungary, Lithuania, Latvia and Estonia in a Nov. 14 letter to Republican House Speaker Paul Ryan that urged Congress to pass legislation that would speed up the approval process for LNG exports, which, they said, would decrease Russia's influence in the global energy market by offering a diversity of supply.

Still, it will be important to watch how serious these countries are in transitioning to U.S. and Canadian LNG, Fogwill said, noting Poland's development of a regasification plant. While agreements were reached for some of the terminal's import capacity, the facility might be better used as a "strategic" way to drive down prices for Russian pipeline gas by signaling intentions to seek supply elsewhere, he said.

"The question becomes: How much do they really need gas flowing through the regasification plants versus getting a better deal from Russia?" Fogwill said.