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Making Lemonade. LNG Exports Could Change Everything

Sometimes learning is about getting your mind changed.  Over the past couple of days at Bentek’s Benposium conference in Houston there were a lot of presentations and powerpoint slides looking at all sides of the LNG export issue.  I’m still not convinced that we’ll see more than one terminal built in the U.S.  But I was convinced of three things:  (a) there is a need for LNG exports to balance oversupply in the natural gas market, (b) pricing differentials support the economics necessary to build these facilities, and (c) if even a couple of the liquefaction plants and terminals are built, it will have a big impact on the natural gas market in North America. 

When life hands you lemons, make lemonade.  That is a favorite saying of my good friend and colleague Scott Potter.  And it certainly applies to the LNG business in North America.  Long ago in the time “Before Shale” (B.S.), more than 60 LNG import terminals were at some stage of promotion, planning or construction.  Before the reality of increasing U.S. natural gas production finally killed off this idea, a total of 13 terminals had been expanded, restarted or built from scratch.  Guess 13 was an unlucky number.  In any event, most of these terminals have been idle for years.  The graph below tells the sad story.   This is sendout of LNG terminals into the natural gas pipeline grid – a number captured daily by the Bentek system.  Most of these terminals were being contemplated in the mid-2000s, and when the spike in LNG activity happened in 2007, it looked like positive confirmation that the massive import scenario would come to pass.  But by 2008, even with high gas prices the story was already looking questionable.  And except for a weather related spike here and there, it has been a slow death since.  For the past two months, the total of all U.S. LNG sendout has been less than 0.3 Bcf/d.   Only Elba Island is seeing any activity.  All the other terminals are ghost towns.

After pouring billions into these terminals, their owners and operators definitely need to take their lemons and make lemonade.  And that’s just what they are planning to do.   Ten export projects have been proposed with a total export capacity of more than 16 bcf/d.  The arbitrage between U.S. gas prices and international prices is staggering.  As we well know, prices here are languishing somewhere in the $2.00-$3.00/MMbtu range (June NYMEX closed yesterday at $2.59, Henry Hub ICE Cash at $2.61) while Asian prices are $16/MMbtu or more. 

The catch is that these things are incredibly expensive.  Cheniere’s Sabine Pass, the project with by far the most traction has said its construction contract with Bechtel has a price tag of $4.5-$5 billion.  If you spend that kind of money, you better be right. Particularly if your last multi-billion dollar expenditure for an import terminal didn’t work out so well.

With all of the facts above, I have remained a skeptic when it comes to LNG exports.  I grudgingly had to admit that with the injection of $2 billion in equity by Blackstone into Cheniere for Sabine Pass, DOE and FERC approval of exports out of the terminal and fully contracted capacity with the likes of BG Group, Gas Natural Fenosa, Gail, and Kogas, it does look like this one will get to the finish line.  And probably the Apache, Encana, EOG project in Kitimat, BC makes since, simply because the U.S. need for Canadian imports is declining each year.  So Canada needs to go somewhere with the stuff.  But more beyond this, it looked to me that any more projects would be unlikely because (a) the high cost would make them difficult to fund, (b) there could be a lot of political risk associated with the permitting process, and (c) who knows what will happen to those export permits if natural gas prices have a weather/hurricane related spike.

As I mentioned above, I learned three things at Benposium that softened my position considerably. 

First, the U.S. market needs export terminals. As mentioned in yesterday’s blog posting titled Lightning Round, not only is continued production growth expected in wet and associated gas, the Bentek forecast expects dry gas to be flat or grow slightly due to a huge inventory of uncompleted wells in the dry Marcellus corridor that will take years to work off.   With both wet and dry gas growing, this gets Bentek’s forecast of 2017 U. S. production up to 75 Bcf/d (see graph).   At that kind of number, we need all the outlets for gas that we can find.  Demand from power will soak up a lot of this volume, but it won’t be nearly enough.  It will take increasing industrial demand, lower Canadian imports and LNG exports to keep the natural gas market from collapsing under its own weight. 

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