Next month, the US is set to export its first cargo of LNG from the continental US. Cheniere Energy, the company that won the highly-contentious race to be the first exporter out of the gate, will have some advantages over its US peers, but the global LNG landscape has changed significantly since the company first proposed to build its LNG export terminal over a half-decade ago.
Before diving into the current state of the world LNG market, let’s take a step back and see how we got to where we are today.
In 2001, Cheniere Energy made an announcement to build four LNG import terminals in Louisiana, at a cost of $1.2 billion. As Charif Souki, Cheniere’s CEO at the time, hit the road to raise money, he told investors a simple message: The US is addicted to natural gas and we are running out of it. Therefore, we must import natural gas via LNG from abroad. After seven years, Souki and Cheniere’s vision became a reality, with the inauguration the Sabine Pass LNG import facility in April 2008.
But between 2001 and 2008, the forecast for US natural gas went from gas shortages to gas gluts. Showing off a sparkling new, state of the art LNG import facility, Cheniere was literally trying to sell natural gas into a sufficiently supplied market. It was like trying to sell ice in the North Pole or chocolate to someone in Hershey, Pennsylvania.
Cheniere then set out to do the complete opposite of what the planned to do a decade ago: export LNG. In September 2010, Cheniere was the first company to apply with the US Department of Energy for a permit to export LNG.
The art of a deal
By late 2011, Souki managed to work out a deal for Cheniere to sell $8 billion of LNG over 20 years to BG Group, which is now owned by Shell. In a nutshell, Souki’s pitch was this: US natural gas prices are forecast to stay low because of the abundance of newly-accessible shale gas resources, while natural gas and LNG prices are expected to remain high in Asia.
Why was Cheniere so confident that LNG prices were going to stay high in Asia? At the time, nearly all LNG prices in Asia were linked to oil.
This value proposition was successful, as Cheniere has been able to sell 80% of their LNG export capacity at Sabine Pass under take-or-pay contracts.
The sober start to 2016
Fast-forward to 2016. Cheniere is expected to export its first cargo of LNG out of Sabine Pass this March. As Cheniere, along with other hopeful LNG exporters, know all too well, market dynamics never stay constant and volatility is the name of the game. Commodities are cyclical. When Cheniere and other companies decided to build multi-billion dollar LNG export terminals, there was a large price difference between gas prices in the US and Asia.
For example, the average price for a spot cargo of gas in Asia in 2011, using the Japan-Korea Marker, JKM, was $14.02/MMBtu. A key reason prices spiked was the Fukushima nuclear disaster, which occurred in March 2011, leading Japan to shut 47.5 GW of nuclear generation capacity.
As new LNG facilities came online, prices have faced downward pressure. In 2015, the average JKM price was $7.45/MMBtu, and as of Feb. 3, the average price this year has been $5.73/MMBtu.
Awash in LNG
So how did we get to where we are today? Put simply, demand has recently failed to keep up with supply. Platts unit Eclipse Energy Group data shows global gas demand growth was insignificant in 2015, rising by a mere 700 MMcf/d, while at the same time roughly 2.2 Bcf/d of new export capacity was added. Over the next five years, total global export capacity is expected to grow by an exceptional 133.5 mtpa (17.8 Bcf/d), a 44% increase.
The US as a global swing supplier
Eclipse data shows that by 2020 the US will have become home to 15% of global liquefaction capacity and could become the world’s third largest exporter (behind Australia and Qatar). And due to the inherent flexibility of US LNG tolling agreements, American exporters have a good chance of becoming a swing supplier. Unlike other LNG contracts, US LNG tolling agreements do not have fixed destination clauses, allowing US-sourced LNG cargoes to show greater optionality in spot markets.
The balance between global LNG demand growth and global LNG supply will be the two key variables in determining how quickly and to what extent American LNG plays a role in the global market of the future. Another key factor will be the price of US natural gas. Platts Analytics forecasts Henry Hub spot prices averaging $2.45/MMBtu in 2016 and increasing to $4.19/MMBtu in 2020.
Even though it appears to be a buyer's market for now, the US is quickly becoming ready for when the tide turns. At this point, the world will find out just how capable the US can be in the LNG market. For now though, at least they can say something that they weren’t able to say a year ago: We are ready to play.