In 1H22, within just six years after becoming the net exporter of gas, the US overtook Qatar and Australia as the world’s largest LNG exporter.1 Final numbers from full calendar year 2022 are just trickling out: Reuters projects that the US slipped be-hind Australia slightly (10.6 billion ft3/d, against Australia’s 10.7 billion ft3/d), whereas Bloomberg assesses that Qatar and US finished 2022 tied for the world’s top LNG exporter – and that the US would have finished ahead but for the Freeport LNG shut down in June 2022.2 Indeed, the US is on track to again become the world’s biggest exporter of LNG in 2023.3 Just under two decades ago, analysts speculated that the US would be the world’s largest LNG importer by 2015 – illustrating just how dramatic the LNG market changes have been.
Fundamental features of the US LNG industry
Since the shale gas revolution, natural gas has become an abundant resource in the US. According to bp’s Statistical Review of World Energy 2021,4 the US total proved reserves of natural gas at the end of 2020 were 445.6 trillion ft3, which placed the country in fifth position globally after Russia, Iran, Qatar, and Turkmenistan.
Extensive gas infrastructure
The US has the longest network of pipelines and the most extensive natural gas production, gathering, processing, and storage system in the world.
Liquid gas market
Unlike anywhere else in the world, US LNG export facilities do not depend on dedicated upstream gas developments. Feedstock gas for liquefaction facilities is drawn from the liquid and deep domestic wholesale natural gas market. Henry Hub is the world’s most liquid gas trading hub which readily establishes a market clearing price for gas, and increasingly for LNG.
While LNG prices are predominantly based on a slope, a percentage of a crude price index, the early US LNG export contracts contained a fundamentally different price mechanism. The US price mechanism was designed to assure the developer of the liquefaction facility of a steady rate of return, usually under a tolling agreement, with the gas price risk passed to the buyer. A US LNG pricing formula typically includes four elements:
- The Henry Hub index.
- A surcharge (typically 15%) for fuel used in liquefaction and possible differential between Henry Hub and the location of the plant.
- A fixed liquefaction toll.
- A freight charge.
Originally, most of US LNG contracts were on free on board terms, providing buyers destination flexibility; this trend has changed recently, when US sellers gained a stronger bargaining position, demanding more traditional features in newly signed LNG contracts, including fixed destination.
These features, coupled with mature, sophisticated financial markets, favourable regulatory regime, and relatively few constraints on future LNG terminal development in the Gulf Coast region have been critical for the pre-eminence of US LNG.
While fundamentals for the growth of the US LNG export have been in place, more or less, since 2015, it was not until flows of Russian pipeline gas to Europe were shut off in 2022 that US LNG exports rose to the dominating global position. However, the rise was not as significant as could have been expected, due to the Freeport LNG shut down in June 2022. The question is whether the US dominance of LNG markets can be sustained in the long term. A few external factors playing into that question are considered.
As a starting point, it is worth pointing out that the notion of dominance of a global LNG market is somewhat loose. While LNG portfolio play and trading activity have increased substantially, LNG is still not a global commodity and there is no single global LNG market. Regulatory regimes, types of buyers and sellers, availability of pipeline gas, and other energy sources are factors differentiating each region and country.
In 2022, most of the LNG from the Gulf of Mexico was exported to Europe. Energy security concerns altered somewhat Europe’s course towards a net-zero future. However, European governments have consistently emphasised that they will treat LNG as a short-term relief only, seeking to replace Russian pipeline gas with renewable and nuclear energy. Some observers are expressing concerns that US LNG export facilities may become stranded assets unless Europe’s renewable energy ambitions fail to materialise. With predictions of strong Asian demand, this mooted risk of stranded assets is not material.
Separately, according to a Wood Mackenzie report,5 LNG projects typically have significantly higher emissions intensities than pipeline gas projects, and are some of the highest in the upstream oil and gas sector. In the current geopolitical climate, LNG’s higher emissions have not been given any consideration in Europe. Conversely, the European Commission maintains that LNG “can contribute to enhancing the diversification of gas supply and accelerating the decarbonisation of gas markets.”6 So much so that while Russian pipeline gas supply dwindled, Russian LNG supply into Europe has actually increased, making up approximately 15% of Europe’s total LNG supply in 2022.7 This fact, coupled with Europe’s unplanned return to environmentally-undesirable coal in 2022 amidst security of supply concerns, suggest that LNG demand will not be negatively impacted by environmental considerations.
European demand for US LNG
According to Independent Commodity Intelligence Services data, by the close of 2022, the largest source of European LNG imports was the US, with some 44% of the European import market.8 This represented a substantial increase in European demand for US LNG over 2021. Put otherwise, some 68% of the LNG exported from the US has a European destination, per Kpler.9
While in the short term, the US will remain Europe’s primary LNG supplier, in the long term, European demand for US LNG is far from certain. The rhetoric about the transition scenario where Europe is reducing its dependence on Russian fossil fuels has been consistent for years, but timing of the transition remains a question. In addition to environmental considerations, the costs of US LNG supplies are increasingly becoming subject to closer scrutiny as European governments, utilities, and households shift focus from security of supply to managing costs. At the moment, neither climate ambitions nor economic considerations are sufficiently pressing when weighed against threat to European energy security. Indeed, at the end of December 2022, German power producer, RWE, entered into a 15-year sales and purchase agreement (SPA) with Sempra, a US LNG company, from its Port Arthur LNG Phase 1 project under development in Texas.10 First cargos from Port Arthur LNG Phase 1 are not expected until 2027. Portugal’s Galp entered into a 20-year SPA with Texas’ NextDecade for supplies from Rio Grande LNG, which expects final investment decision (FID) in early 2023. All told, US LNG exporters entered into more than 20 supply contracts in 2H22, according to Bloomberg.11 These long-term SPAs with take-or-pay provisions, along with spot purchases, indicate that demand for US LNG in Europe will likely continue. However, the impact of the recently agreed European gas price capping regulations on US LNG import remains to be seen.
Expansion of regasification capacity in Europe
EU and UK regasification capacity is projected to expand significantly by the end of 2023 – approximately 3.5 billion ft3/y – with a further expansion expected in 2024.12 Global liquefaction capacity must be increased if imports are to remain affordable. The larger challenge, however, is procuring adequate LNG sources to supply these facilities. Without US LNG supplies, that challenge would be impossible to overcome.
Written by Mark Stadnyk and Tatiana Gotvig, Squire Patton Boggs.
Read the article online at: https://www.lngindustry.com/special-reports/09032023/the-rise-to-the-top-for-us-lng/