Evaluate Energy in recent analysis reported that liquefied natural gas (LNG) production will grow an additional 50 percent over the next five years if all known projects are completed.
Asia-Pacific LNG demand is strong, but growing shale gas volumes in the U.S., a trend unforeseen when the LNG projects were conceived and implemented, has lowered the expected demand curve, thereby eating into the potential profitability of these new facilities and postponing the vision that investors originally had of the role of these giant projects.
"It's hard to know which way round this is working: to what extent is additional spot LNG availability putting a lid on gas prices in North America or, alternatively, to what extent is additional shale gas supply in the U.S. undermining demand for LNG. But we do know that LNG spot cargoes have been offered at par with domestic gas prices in the U.S. for some time, giving much lower netback for producers than they might have been hoping for when they decided to invest in these megaprojects," Evaluate said.
National oil companies such as Qatar Petroleum, Sonatrach and Petronas continue to dominate the LNG business, but oil majors such as Shell, ExxonMobil, and to a lesser degree BP and Total, have substantially increased their exposure to the sector. By 2020, Shell will be the third largest equity holder in the global LNG business and ExxonMobil the fourth. This represents an estimated industry-wide capital cost of $200 billion over the next decade, based rising capital cost intensities of the new LNG projects.
ExxonMobil and other large international oil companies are investing in LNG in anticipation that natural gas will be the fastest-growing major fuel source. ExxonMobil noted in its Energy Outlook to 2030 this year that gas demand will grow for power generation, especially in Non-Organization for Economic Cooperation and Development countries. The shift away from coal to reduce carbon dioxide emissions also will boost demand for gas.
Major oil companies also have been finding it difficult to replace reserves organically and finding it even harder to gain access to reserves-rich countries while oil prices were rising. These considerations still apply, Evaluate said. However, horizontal drilling and fracking for shale gas "were a mere glint in a driller's eye" when many decisions were made to build these huge capital intensive, 'lumpy' projects.
"Forecasters expected the U.S. would need substantial imports of LNG as domestic gas production and imports from Canada fell. They fell into the classic forecasting error of projecting present trends into the future and not being fully aware of a real gamechanger, what Nicholas Taleb has called a "Black Swan".
Instead, the U.S. now imports only small amounts of LNG from Egypt, Nigeria, Norway, Peru, Qatar, Trinidad and Tobago and the Yemen at prices that averaged just $4.81 per thousand cubic feet, according to the U.S. Energy Information Administration (EIA). These prices are only a shade higher than the depressed Henry Hub domestic marker price.
The outlook for LNG imports into the U.S. isn't likely to get better anytime soon. In its latest Annual Energy Outlook, the EIA estimates that the requirement for gas imports will be totally flat through 2020. "So we are moving into an era in which the potential exists for LNG imports into the U.S. but there is little demand for it."
Several companies are moving to propose new LNG export projects out of North America, offering a release valve for surplus natural gas. This might ease prices in North America but will have a knock-on effect in Asian markets. Import terminal developer Freeport is proposing a $2 billion 1.4 Bcf/d export facility at their existing import terminal in Texas for start-up in 2015.
Cheniere Energy is planning to make its existing regasification plant at Sabine Pass, La., into a bidirectional facility, allowing some 2.4 Bcf/d of LNG exports. The Kitimat project on the west coast of British Columbia has also changed plans to export rather than import LNG into the West Coast.
With new LNG capacity coming onstream so fast, a potential overhang of spot LNG is one the factors that may be keeping gas prices low in the U.S., Evaluate noted. "And as far as the LNG project owners are concerned in the producing nations – IOC and NOC [national oil companies] alike – it will be the pace of LNG demand growth in Asia relative to the build up in LNG production capacity that will dictate how tight or slack the LNG spot market will be over the next few years."
Recent signs are that Asian LNG demand is picking up, leading to an outrush of optimism among LNG shipowners and builders, but it is perhaps too early to say whether this is a temporary spurt or a sustainable surge. "That's the inherent problem of an industry that moves forward in large supply steps that are sometimes out of line with demand."
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