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Light at the end of the tunnel

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LNG Industry,

On 24 February 2016, a cargo of LNG left the US mainland for the first time, heading for an export market. The Asia Vision tanker, commissioned by Cheniere Energy, began its shipment of LNG from the company’s Sabine Pass terminal to a regasification facility in Brazil, heralding a new era for the US energy trade. The US has already been exporting LNG from the Kenai terminal in Alaska since 1969, but the cargo dispatched from Sabine Pass in February represents something different; the launch of a new wave of LNG from the US mainland that has been made possible by the country’s recent shale gas boom. As a result, the US will become a net exporter of natural gas by the end of this decade.

However, the launch of LNG exports from the lower 48 states has occurred in difficult market conditions, which were perhaps not anticipated even 18 months ago. The US shale boom raised prospects that significant volumes of natural gas would be available for export markets, and, in turn, encouraged energy companies to submit dozens of applications to US energy regulators for permission to export LNG and build liquefaction terminals. The issue now, however, is not that the domestic supplies of natural gas are not there for export, but that the global gas market has been turned on its head since the gas export frenzy began. Global prices for natural gas have collapsed due to the drop in the oil price and weakened gas consumption growth in key gas-importing markets.

Expectations of lucrative arbitrage opportunities (especially in Asia) for North American LNG exporters have been dashed for the time being. The outlook for global LNG is now bearish, in marked contrast to the bullish expectations of 2011 – 2013. Nevertheless, an LNG cargo has now been exported and, by 2020, the US will be one of the major global LNG exporters, alongside Qatar and Australia. The difference is that, due to the current tough market conditions, US LNG projects that have already been sanctioned may take longer to produce to capacity, while the rate of further project sanctioning will stall in the nearer term.

To export or not to export

The US shale gas production boom that began around 2009 – 2010 generated a hotly contested debate about the future of the US gas market. Large, domestic users of natural gas, such as the petrochemical industry and utilities, cautioned against prioritising the export of the US’ shale gas bounty in the form of LNG out of fear that it would lead to steeply rising domestic gas prices. However, the oil and gas industry urged the Obama administration not to stand in the way of the development of a US LNG for export sector, as it represented a unique opportunity not just for the US to become a major energy exporter, but also for the country to become an influential player on how the global gas market operates.

Global gas exports (both pipeline and LNG) are dominated by a few suppliers, such as Russia and Qatar, who mainly utilise oil-indexed pricing and long-term contracts when selling gas to consumers. Furthermore, the North American, European and Asian gas markets are quite distinct, meaning that the gas trade is not quite as fungible compared to how the global oil trade operates, with its multiple sellers and buyers all over the globe. Significant volumes of US LNG entering the market would not only provide competitive pressure on existing exporters, which would benefit large gas-importing economies in Europe and Asia, but contribute to making regional gas markets more inter-connected and liquid.

Project sanctioning begins in earnest

The debate on whether the US should export LNG has largely moved on…

This article was originally published in the April 2016 issue of LNG Industry. To read the full version of this article, sign in or register for a free trial subscription.

Written by Peter Kiernan, The Economist Intelligence Unit (EIU), UK. Edited by

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