America’s LNG Export Boom Hinges on Infrastructure

The US is set to become a key liquefied natural gas exporter in the coming years. But new infrastructure – such as pipelines and export terminals – needs to be built to keep up with burgeoning domestic output of gas, a tall order given softening prices.

Growing Gas and LNG Output

  • Gas output will expand by 24 billion cubic feet, or 32 percent, through 2025 from last year, according to U.S. Energy Information Administration estimates.
  • To support that growth, the country’s gas industry needs to spend $170 billion over the next seven years on pipelines, compressor stations, export terminals and other related infrastructure, said Meg Gentle, chief executive officer of gas exporter Tellurian Inc.
  • “One threat to the U.S. being able to export LNG and expand its export capability is the overall commitment to invest in infrastructure to move natural gas,” Gentle said.

US shale producers are ramping up production  of natural gas with the hopes of shipping to overseas markets such as China and India to fetch better prices. In fact, our nation is slated to become one of the world’s three largest liquefied natural gas (LNG) exporters, along with Australia and Qatar, in the next few years.

But a lot of that depends on our LNG export infrastructure.

Today, only two terminals – Cheniere Energy’s Sabine Pass in Corpus Christi, Texas, and Dominion Energy Inc.’s newly opened Cove Point facility in Maryland – handle all of the nation’s LNG exports in the lower 48 states.

The good news: Cheniere is expanding the terminal in Louisiana to five trains, handling 3.5 billion cubic feet per day.

And that’s not all.

Five additional LNG projects have been approved in addition to Cheniere’s, which would spike capacity by almost 10 billion cubic feet per day.  Most are slated to go online by end of the year or in 2019.  Four additional projects have been approved but construction hasn’t begun.

“It’s jobs and investments, and adding value by changing natural gas into liquefied natural gas that can be used elsewhere outside of the US or Canada,” says Michael D. Maher, senior program advisor at the Houston, Tx.-based Center for Energy Studies at Rice University’s Baker Institute for Public Policy.

The approved terminals under construction include:

  • Sempra-Cameron’s 2.2 bcf/d capacity in Hackberry, La;
  • Freeport’s 2.14 bcf/d capacity in Freeport, Tx.;
  • Sabine Pass Liquification’s in Sabine Pass, LA with 1.4 bcf/d capacity;
  • Cheniere’s 2.14 bcf/d capacity in Corpus Christi; and
  • Southern LNG Company’s .35 bcf/d capacityin Elba Island, Ga.

These facilities will handle only about 15 percent of the roughly 70 bcf/d produced in the US. And each facility could take up to four years to complete.

Howard Energy's Maverick Terminal. Credit: Port of Corpus Christi

“People are betting that the use of natural gas in India and China will keep going up. They’re betting on the expansion of that demand.”

New competitors and softening prices

Several competitors of Cheniere Energy, such as NuStar Energy, Howard Energy Partners, BuckEye Partners too have expressed interest in building new LNG facilities.

All of these players are looking into the future and betting what demand will be, Maher explains.

“People are betting that the use of natural gas in India and China will keep going up. They’re betting on the expansion of that demand,” he says.

Sean Strawbridge, the CEO of the Port of Corpus Christi, explained that the LNG industry has undergone a “reversal of fortune with the energy renaissance and large producing fields and new technology that are producing extra oil and gas.”

Several years ago, conventional wisdom was that the US was going to be net short on natural gas. A far cry from today, when natural gas fields are being constructed, “lines are being tapped and we’re seeing many of these facilities retooled to export LNG into the global market,” Strawbridge said.

In essence, the tables have turned on the low expectations for the LNG market in the US years ago. However, the increased supply have dampened prices.

“We have much more supply than demand right now,” Strawbridge says.  Any time a market is disrupted, he says, you see “market gyrations, but eventually they stabilize.  But right now, as we look at natural gas future contracts, they continue to remain low.”

Today, global LNG prices are hovering around $2.82 a cubic ton. It had been priced at $6 or $7 a ton several years ago.

The Baker Institute questions whether all six LNG terminals will be economically viable, given dampened prices. They might turn profitable in the next two or three years, Maher indicated, but that will depend on whether demand perks up, based on additional supply.

While LNG production has jumped in places such as Russia, the Middle East and Australia over the past couple years, LNG demand mostly has stemmed from China, explains Muhammed Ghulam, a Houston, Tx.-based industry analyst at Raymond James Financial.

China has been emphasizing moving away from coal to cleaner liquefied natural gas. But given the current imbalance between global LNG production and demand,  Ghulam says that most of the proposed facilities may not be built.

For instance, Chris Cho, a spokesperson for NuStar Energy, acknowledged that “We do not have any LNG plans” at this point, underscoring that some of these planned new LNG ventures may not materialize.

“No one’s putting money in the ground.,” Ghulam points out. “Despite all this talk, there are still only six new facilities coming on board.”

Cheniere Energy's terminal expansion.
Cheniere Energy: At the forefront

Either way, Cheniere Energy will do fine.

“Cheniere managed to get out of ahead of everyone because they were the first one to build,” Maher says.  Much of its long-term capacity is already spoken for, so the question is how will the other six to eight new LNG terminals fare down the road? he says.

The New York Times reported on October 16, 2017 that Cheniere had invested $18 billion to develop its new Sabine Pass terminal on Louisiana’s Gulf Coast. It’s now pumping about $30 billion into a second facility in Corpus Christi in 2019.  Originally they were built for importing LNG and now they’re focused on exporting.

Michael Wortley’s, Cheniere’s chief financial officer, was quoted as saying, “We’re not talking about the next couple of years, we’re talking about the next 50 years.”

In fact, cheap natural gas prices could boost business and margins for an LNG exporters like Cheniere Energy.

The Commodity Futures Trading Commission, a federal agency that regulates futures and options markets found that shipping gas overseas could raise costs for Americans. Domestic prices could rise as much as 20 percent due to the burgeoning LNG industry so it can be shipped around the world on tankers, according to a CFTC report.

But that’s years down the line.

Today, “we have a position of more supply than demand,” Ghulam notes.

Export numbers spiking

New LNG infrastructure could vastly increase exports.

Strawbridge noted that 95 percent of LNG production in the US is being shipped to international markets, rather than for domestic use.  He sees this as a strategic opportunity to close the $380 billion trade gap with China which is hungry for LNG.

Even with increased exports, the US still has abundant domestic supply.

“We have more natural gas than we know what to do with,” Strawbridge says.

And that could have long-term impact on the LNG market, according to Ghulam, who concludes “Natural gas prices are unlikely to ever get back to where it was. Our view is they will stay below $3 because there is so much supply.”

And while that makes prices good for exporting LNG, the ramification of stagnant pricing is that “some of these facilities won’t be economically feasible,” he says.

Wires have contributed to this report.

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