By Noam Ayali and Ginger Collier3
In 2016 and 2017, trains 1 - 3 of the Sabine Pass liquefaction project came on line, marking the first time that natural gas has been liquefied and exported from the lower 48 states. Dominion’s Cove Point LNG project is in the process of commissioning its first train, and the Corpus Christi LNG and Cameron LNG projects are all in advanced construction phases and expected to come on-line next year. Collectively, these projects are expected to add 29.2 mmpta of liquefaction to the global production output. In total, nearly 58mmtpa of new US liquefaction capacity is under construction, according to the International Gas Union, equivalent to 17% of total existing global capacity, and according to Petroleum Economist, the US is expected to account for about half of all LNG export capacity growth over the next five years.
At the same time, the debate surrounding the appropriate regulatory regime for approving LNG exports, especially authorisation of exports to non-Free Trade Agreement countries, continues unabated. Advocates for maintaining or tightening the current regulatory regime, mostly manufacturing groups and politicians from states with large natural gas consumption, argue that increasing LNG exports to non-FTA countries drives up the price for natural gas domestically, harming manufacturers not only by increasing their commodity costs but by rewarding countries without trade agreements who subsidize their manufacturers and impose import tariffs on U.S. manufacturers. These advocates also point to the recent regulatory action in Australia (see above). Those in favour of a more free market approach and loosening restrictions argue that, even with a significant increase in LNG export authorizations, such exports will still constitute a small percentage of total U.S. natural gas production, and that the modest impact on domestic natural gas prices would be outweighed by the overall benefit to U.S. both financially and in terms of it having an enhanced role in the global energy market.]
Meanwhile, the hectic pace of liquefaction development in the U.S. has slowed somewhat, not so much because of the regulatory framework debate, as much as because of supply/demand and competitive pressures in the global LNG industry. Significant liquefaction capacity has recently come online in Australia; Qatar has decided to lift its self-imposed moratorium and resume aggressive development of its existing and planned liquefaction capacity from the North Field; and large natural gas discoveries offshore East Africa and elsewhere in the continent are driving LNG liquefaction plans in Mozambique and Tanzania, as well as West Africa and Egypt. With several other U.S. liquefaction projects now holding both FERC and DOE approval for their projects, the large amount of additional capacity that has come online and is currently under construction or in the planning phase has led to concerns of a potential LNG supply glut.
Timing of the perceived supply glut could not be worse from a seller's perspective. In a low oil price environment, converging and declining LNG spot cargo prices across Europe, Asia and North and South America (in many instances to a price below full capital cost recovery for new liquefaction projects) have become the norm, slowing demand even further and giving buyers the upper hand in negotiations for long-term supply contracts that are necessary for the next wave of US liquefaction projects in order to secure long-term financeable off-take agreements.
Rebounding demand for natural gas in Europe and India and demand growth in China may provide new opportunities for traditional long-term off-take agreements with creditworthy large-scale utilities. Nevertheless, as noted above, there will likely be pressure for more favourable pricing and other terms (eliminating destination restrictions, etc.), a trend that has already started with the recent move by larger, more traditional purchasers of LNG (think JURA) entering into cooperative agreements for joint procurement of LNG. Market seers suggest that it is unlikely that traditional off-takers will be able to absorb all of the liquefaction capacity in the pipeline.
To take advantage of new markets, with smaller or less frequent buyers of LNG, the next wave of US liquefaction projects will need to develop more flexible and creative pricing structures, possibly take account of regional pricing indices, and be prepared to offer shorter term agreements or a combination of short-, medium- and long-term LNG sales agreements. Sponsors of these new liquefaction projects will need to educate and convince their financiers to provide financing on the basis of such off-take agreements, rather than the traditional long-term agreements with large, credit-worthy utility off-takers.
Interestingly, the surge in development, financing, construction and deployment of FSRUs and the increased focus on small- and mid-scale LNG facilities may be the solution to soaking up the excess supply, and allow more sellers to find outlets for their LNG production.]