by Christina Nagy-McKenna, Enerdynamics Facilitator
The natural gas market, like all commodity markets, is a moving target that once again is shifting. But for U.S. gas production there is a new factor: global price exposure due to U.S. liquefied natural gas (LNG) export capability.
On February 24, 2016, the first LNG tanker filled with U.S.-produced, non-Alaskan natural gas set sail for an overseas market. The Asia Vision left Sabine Pass LNG terminal in Texas and headed for Brazil.
The road to the export market began in 2011 for Cheniere Energy, the company that owns the Sabine Pass facility and the first company to apply for an export license with the U.S. Department of Energy. During the subsequent five years several things occurred:
- Russia made it no secret that it was unhappy with the prospect of competing with the U.S. for natural gas sales to Europe;
- natural gas prices fell to $1.85/MMBtu at Henry Hub;
- global market demand no longer could keep up with expanding supply;
- and Australia roared into the LNG export market.
Two years ago Russian President Vladimir Putin expressed his doubt that U.S. exports of LNG would impact his country’s substantial market share of natural gas in Europe. Asian markets, in Putin’s opinion, were more lucrative for the U.S. However, the economic slowdown in China, the drop in global oil prices, and the return of nuclear-generated electricity in Japan, have put downward pressure on natural gas prices in Asia, thus making it a less lucrative market for LNG exports.
As the U.S. enters the LNG export market, some key questions surrounding the global market situation remain to be answered:
- Can U.S. LNG erode Russia’s European market share?
- Will Australian LNG supply further erode market opportunities?
- Will U.S. demand remain weak relative to supply?
- Will world demand also remain weak?
Ultimately the answers to these questions will determine LNG’s impact on U.S. gas markets. We’ll look at the first two questions in this post and discuss the questions relating to U.S. and global demand in next week’s post.
Can U.S. LNG erode Russia’s European market share?
While the European Union may be cautious about doing business with Russia because of recent geo-political events, European utilities do not share the EU’s concern. This means that whoever wins the European market will have to do so with competitive prices.
Whether the Russians, with a weak ruble and falling oil and gas prices, can compete long term in a slash-and-burn economic fight is up for debate. Some analysts forecast that Russia will take a page out of the Saudi playbook and simply crank up the volume on production, flood the market, and absorb the impact from lower prices. Others believe Russia has no room to cut prices based on their analyses of Gazprom’s production and transportation costs. The mild winter weather in Europe this year is not fueling the issue. It will be one to watch during the winter of 2016-2017.
Will Australian LNG supply further erode market opportunities?
Australia is ready to make its presence felt in the global LNG market. Gorgon LNG in Western Australia is a mega project operated by Chevron and owned jointly by Exxon Mobile, Shell, Osaka Gas, Tokyo Gas, and Chubu Electric Power, presumably giving it the inside track on portions of the Japanese market. Chevron announced this week that it expects its first shipment of LNG to depart Barrow Island later this week. Two more liquefaction trains will come on line in the next year. In addition, three other LNG projects are under construction in Australia and three additional projects have been commissioned since 2014. The EIA estimates that Australia will have a capacity of 11.5 Bcf/day by 2019 and will overtake Qatar as the world’s largest global liquefaction capacity holder. Some of the LNG will stay in Australia, but the majority is earmarked for Asia.
Next week we’ll explore the status of gas demand in the U.S. and around the world and how demand may impact the U.S.’s success as an LNG exporter.