With natural gas prices stubbornly below $3 since the first of the year, then seemingly stuck in the mid-$2 range, and more recently dipping below $2, many producers and traders have been looking forward to LNG exports as a long overdue and hopefully long lasting stimulus for the industry. Unfortunately, recent developments in the LNG markets have imperiled the outlook for US LNG.
Disappointing Asian Markets
Most of the already invested dollars in developing LNG export capabilities in the US have been focused on what were expected to be very lucrative Asian markets – with much of that specifically centered on Japan. Unfortunately, with the restarting of many Japanese nuclear power plants underway, demand for LNG in Japan is falling.
While the US LNG export facilities under construction have been largely financed with long-term agreements from Japanese buyers, recent news that the largest buyers in Asia are shying away from fixed term, fixed destination contracts is making additional development difficult, if not unlikely. In fact, it’s this developing short-term or spot market for LNG that appears to be the biggest threat to additional LNG development in the US.
With more and more global LNG buyers shying away from oil indexed, long-term agreements, and a growing fleet of non-dedicated tankers becoming available, a more liquid market for LNG is rapidly emerging – and will undoubtedly lead to a more efficient distribution of supplies. In a highly liquid spot market, those producers with low cost production and the best geographic positioning will gain the largest share of the market.
Geographic Disadvantages
With increasing competition from better positioned producers, such as those in Russia, Australia, and eastern Canada, the US Gulf Coast and Eastern Seaboard regions' geographic disadvantage to the Asia market is looming larger than ever. While hard numbers are difficult to come by, most estimates put the cost of liquefying and shipping LNG from the Gulf Coast or the Northeast US to the Asia markets to run anywhere from $5 to $8/MMBtu. As of this month, spot LNG prices delivered in Japan were below $8, and many analysts expect prices in 2016 to fall to around $5 and as low as $4 in 2017. If these forecasts come to fruition, incremental US supplies will clearly be priced out of that market.
With Asia becoming a less likely market for US LNG (other than the currently contracted volumes, of course), the European markets are the natural fallback. However, with declining demand for natural gas in Europe due to increased production of renewable energy and a continuing low-growth economy, most analysts believe Russia will price their pipeline supplies into that market at or near the marginal LNG price, limiting those LNG imports in order to maintain their market share and hard currency income. With existing LNG supplies available from the Middle East and North Africa, combined with increasing production available via existing pipelines from Norway, US LNG could have a hard time gaining much of a foothold in Europe.
Bottom line, while US LNG producers are not necessarily facing doom (and particularly not those that have signed long-term, take-or-pay agreements that will make them profitable even if their plants never run), if the current market trends continue as they are, with low growth in natural gas demand in Asia and Europe and increasing supplies from better geographically positioned producers, US gas producers are unlikely to see much if any windfall from LNG exports.
Future Changes
If prices do suddenly rise, the US is well positioned to respond. With more than a thousand gas wells drilled but not completed in just the Marcellus region, and very recent improvements in drilling and completion techniques that have dramatically reduced drilling times and yielded huge increases in initial production (a recent Utica completion in Pennsylvania came in at over 70 million cubic feet per day!), US E&P’s are positioned to react quickly to take advantage of any price signals that indicate a shortfall in production.
Manage the Operational Challenges in Liquefication and Regasification
Natural gas has a very important role in the energy supply for the world, but companies require sophisticated ETRM software platforms to manage its usage. There are several different stages throughout the supply chain and product and quality must be effectively tracked at each stage: from the initial stage as natural gas, to transportation to a liquefication plant, to shipment in liquid form to be regasified to become LNG. Support for the changing forms of natural gas and its global nature are unique challenges in the supply chain. (Learn more in "How ETRM Software Supports the Growing Use of Natural Gas.")
Delivering LNG requires very sophisticated software. Eka's InSight CM - LNG manages the entire LNG lifecycle from capturing physical transactions to scheduling and tracking best available positions. The next-generation ETRM software provides a seamless process for efficient scheduling of natural gas positions that are to be liquefied and regasified. With Eka’s platform, traders, schedulers, and accountants have the real-time data needed to deliver the efficient, profitable scheduling of LNG.