As U.S. liquefied natural gas export capacity ramps up in 2019, market trends in Asia are sending a "warning signal" that U.S. export facilities could become overbuilt for the short term, which could exacerbate gas market growing pains in the Southeast, industry observers said at a regional gas conference.
Feedgas flows to U.S. LNG terminals are expected to keep increasing through 2019 as natural gas liquefaction units at three new terminals come online and as total U.S. LNG export capacity climbs toward 9 Bcf/d. That is more than double the export capacity of the U.S. when Dominion Energy Inc.'s Cove Point LNG in Maryland came online early in 2018. Industry observers at the LDC Gas Forum Southeast in Atlanta said the new capacity will drive price volatility in the Southeast market and create deliverability challenges for other types of gas buyers.
"We think there is a risk through at least the next two years, with international demand catching up with the supply," said Clifton White, a director of global commodities research at Bank of America Merrill Lynch.
Despite a global LNG oversupply that is currently depressing prices, the LNG industry has focused on a tightening market expected in the mid-2020s. U.S. developers of second-generation LNG projects seek to commercially sanction their projects soon to take advantage of this demand.
Asia is a key growth market. This is especially true in China, where LNG imports are supported by state efforts to reduce air pollution from burning coal. Growth in Asia should support LNG prices that are high enough to make it profitable for U.S. companies to send cargoes there, said Jared Kaiser, COO of gas origination and operations for BP Energy Ltd.'s North America gas and power business unit. But the slowdown in the global market could at least temporarily affect that opportunity, Kaiser said.
"The question becomes: If those markets change, is it the U.S. that's a marginal exporter, or is it somebody else?" Kaiser said. "I don't think we know the answer to that question yet."
Near-term market dynamics have contributed to the current oversupply. Recent months have seen shipments to major demand markets in the Asian-Pacific region become less attractive because of depressed prices. Contributing factors include bottlenecks in China's regasification capacity and delivery infrastructure and the displacement of LNG imports in Japan caused by the country's nuclear reactors slowly returning to operation, White said.
The trend in Japan is offsetting a tailwind for U.S. LNG in South Korea, where tax policy provides an incentive to burn gas over coal, White said.
"Asia is kind of sending a warning signal to us right now, in our opinion," White said on an April 16 panel. He added later, "Right now, the market believes if you give the globe LNG supply, it's going to take it. 'It' being Asia, mostly China … We don't think Asia is there to do it."
Europe in recent months has served as a market of last resort for uncommitted LNG volumes that historically could find higher prices in the Asian-Pacific region. But some analysts have cautioned that could change this summer, as European gas inventories rise. That would increase the risk that U.S. LNG producers might have to shut in some LNG exports or begin maintenance.
The growth of U.S. LNG export capacity will require more pipelines to be built and force other types of gas buyers to prepare for increased competition for the fuel, industry experts said. The new U.S. LNG export terminals expected to come online are Kinder Morgan Inc.'s Elba Island LNG terminal in Georgia, the Sempra Energy-led Cameron LNG project in Louisiana, and the Freeport LNG Development LP facility in Texas.
A conference panel of gas buyers agreed LNG growth will likely drive price volatility in the Southeast. They said it was less clear whether the market will incentivize investments in gas storage that could curb that price volatility.
"When I think about LNG exports, I always wonder if people look up and say 'Oh my God, all this LNG [capacity] is going to get built,' and maybe the assumption is it's going to be full," Kaiser said. "...But you have to have that downstream analysis."