Continental U.S. Begins Exporting LNG Despite Uncertain Global Market, part II

by Christina Nagy-McKenna, Enerdynamics Facilitator

In last week’s post I delved into how the United States’ lower 48 is, for the first time ever, iStock_000067246787_Mediumexporting liquefied natural gas (LNG) to overseas markets. On February 24, 2016, the first LNG tanker filled with U.S.-produced, non-Alaskan natural gas left Sabine Pass LNG terminal in Texas and headed for Brazil.

Many factors are at play that will ultimately determine LNG’s impact on U.S. gas markets. Last week we asked:

  • Can U.S. LNG erode Russia’s European market share?
  • Will Australian LNG supply further erode market opportunities?

 

Continuing our discussion, let’s briefly look at the natural gas supply-versus-demand situation in the U.S. and globally.

Will U.S. demand remain weak relative to supply?

Henry Hub prices and those across the U.S. are at a surprisingly low point, especially since the winter season has yet to end. However, a mild winter and record gas production has led to what is perhaps the lower end, if not the bottom of the market, and this is taking a toll on producers.

Steve Mueller, former CEO of Southwestern Energy, stated last year that higher drilling rig efficiencies have led to lower costs and huge time-savings. The company can now drill twice as far in less than half the time due to technological advancements in the drilling process. However, the darker side of very low prices and robust supplies has reared its head for the company as it announced in January a workforce reduction of more than 40% of its employees. The company had no active drilling rigs at the time, and this was the second workforce reduction since the third quarter of 2015.

In the meantime:  

  • Residential and commercial U.S. consumption is down this winter, according to the EIA.
  • Storage working gas stocks may end the winter season with close to 2,336 Bcf, above the five-year average and close to the record of 2,473 Bcf set in 2012.[2]
  • Low U.S. prices make overseas market more desirable, but they also may be the undoing of the production boom if prices continue to decline.

Will world demand also remain weak? 

The U.S. market is not the only one in which demand is weak: 

  • Platts’ Eclipse Energy Group reports that global demand growth in 2015 was only 700 MMcf/d, while 2.2 Bcf/d of new export capacity was added to the market.[1]
  • Chinese manufacturing has declined for the 11th straight month as of the end of January, and it may be slow to recover as the government moves away from a strategy of increased exports and large capital projects to one of increased domestic demand.
  • Japan has restarted two of its 43 nuclear power plant units that have been off-line since September 2013 following the implementation of stricter safety rules due to the Fukushima nuclear disaster. Twenty-five units have applied for safety inspections that would allow them to restart in the near future. This would reduce Japan’s demand for natural gas as a fuel for electric generation.

To say that the U.S. natural gas market is in an uncertain position is like saying “situation normal” for this volatile commodity. The greater change is the geographic reach of implications as the U.S. enters the global LNG market as an active seller. Just a decade ago such a scenario seemed ludicrous as the U.S. looked to the LNG market as a means of garnering additional supply. Now, in 2016, the U.S. is officially in the export business, and those in the industry will watch intently to see how market competitors like Russia, Australia, and Qatar respond.


Footnotes:

[1] “The U.S. Enters a Brave New World as It Begins LNG Exports,” The Barrel Blog, Platts.com, February 10, 2016

About Enerdynamics

Enerdynamics was formed in 1995 to meet the growing demand for timely, dynamic and effective business training in the gas and electric industries. Our comprehensive education programs are focused on teaching you and your employees the business of energy. And because we have a firm grasp of what's happening in our industry on both a national and international scale, we can help you make sense of a world that often makes no sense at all.
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