U.S. Seen as Possible LNG Hub, but Challenges Remain
Ample supplies of U.S. gas make it unlikely that liquefied natural gas (LNG) exports pose a threat to U.S. energy supply and security.
Rep. Ed Markey (D-Mass.) on Feb. 14 introduced legislation that includes a ban of U.S. LNG exports until 2025. While David Thames, president of Cheniere Marketing, can understand the populism behind such a ban, the idea that gas supply is an issue holds no weight, given the U.S. shale gas boom that has unlocked significant supply and level of gas currently in U.S. storage, he told attendees at the Platts LNG Forum in Houston on Feb. 16.
Some opponents have claimed that LNG exports would threaten national energy supply because ethane and other chemicals derived from gas for industrial use would be exported and taken away from domestic users. However, the U.S. already exports a number of downstream resources, such as liquefied petroleum gas, said Thames.
While the U.S. could become an LNG hub, the prospect of LNG exports does raise some issues, including the limited number of countries to which U.S. LNG exports can be directed. There is a small pool of countries that want to import U.S. LNG and can do so under existing free trade agreements, said V.V. Rao, managing director of Galway Group LP. U.S. LNG exports also will be directly competing with Australian LNG exports and Russian conventional gas supplies, said Bros.
Pipeline capacity in the U.S. also presents an issue for LNG exports, as most pipeline capacity is already contracted to utilities. Pipelines near the Cove Point, Md. LNG facility are already contracted to Marcellus producers, while the Freeport LNG facility in Texas is only connected to intra-state pipelines. Significant infrastructure will be required for most liquefaction projects proposed in the U.S.
Most existing pipeline infrastructure is also set up to move gas north from the Gulf Coast; reversing pipeline flow will be needed to bring gas to Sabine Pass, which will require changes in hydraulics. Multiple LNG export terminals also will be competing for supplies in the U.S.
A number of companies that constructed LNG import facilities in the U.S. are now seeking to add liquefaction capacity in order to export gas overseas to markets with higher gas prices and greater demand. U.S. LNG exports are expected to begin around 2016.
Demand for gas in industrial and power generation in non-Organization for Economic Co-operation and Development countries will be the main driver behind global LNG demand. Japan, China and South Korea are expected to be the top three destinations for LNG imports in the coming years. Asian gas demand has grown to the point that companies are willing to buy gas indexed to the Henry Hub, instead of oil-indexed pricing.
The exact level of global LNG demand will hinge on whether nuclear power usage continues to decline, in the case of Japan, how quickly and fully China develops its shale gas assets, and whether new pipeline infrastructure is built that would boost gas imports into China and South Korea, according to industry officials.
Chinese investment in U.S. and Canadian shale plays, coupled with increased investment opportunities for foreign companies in developing Chinese shale resources, make Chinese shale a wildcard for future LNG demand, said Thierry Bros, senior analyst of European gas and LNG at Societe General.
More than one speaker remarked on the existing outlook for U.S. natural and contrasted it to forecasts made in the mid-2000s that the U.S. would require significant levels of LNG imports to meet domestic gas demand. Even current forecasts for the global LNG market may not be entirely accurate, due not only to known unknowns such as nuclear power demand, but the unknown unknowns, such as the development of hydrates and renewable energy sources such as solar.
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