“There Will Be An Answer, L-N-G”—The Year Ahead for Liquefied Natural Gas

Yesterday (January 14, 2016) Cheniere Energy announced a delay to the first shipment of liquefied natural gas (LNG) out of its Sabine Pass liquefaction/export terminal in Louisiana that was expected this month (January 2016), but is now planned for late February or March of this year. Meanwhile, LNG demand has leveled off. LNG prices have collapsed and stayed low. And a slew of liquefaction capacity planned and committed to years ago—Sabine Pass and other U.S. projects included—is coming online, suggesting an LNG supply glut that could last into the early 2020s. But are the LNG market’s prospects really as grim as all that sounds? Today we begin a review of recent developments in the LNG market, and consider their implications for U.S. natural gas producers, midstream companies, and LNG exporters.

The U.S. has played an outsized role in the global LNG market in the 21st century. From 2000 through 2007, it was assumed that domestic production of natural gas was peaking, and that the U.S. would need to import LNG to keep pace with rising domestic demand. Several new LNG import terminals were built along the Gulf and East coasts. Then, with what now seems like a finger-snap, the Shale Era arrived, and the owners of those new import terminals started developing plans to convert them to liquefaction/LNG export facilities. Plans for “greenfield” liquefaction/export projects came to light too, spurred by the expectation that natural gas from the Marcellus, the Eagle Ford and other prolific shale plays would be so plentiful—and, just as important, so inexpensive—that the U.S. could garner a significant share of global LNG trade (see our A Whole New World blog series and our LNG Is a Battlefield Drill Down report). LNG economics seemed to support this optimistic view, as did predictions that future LNG demand overseas (especially in Asia, but also in Europe and Latin America) would be rising at a steady, healthy clip.

The biggest leg-up for prospective U.S. LNG exporters appeared to be the yawning gap between the combined cost of securing natural gas, liquefying it, and shipping the resulting LNG to Japan, South Korea or China and the (mostly crude oil-indexed) prices that those increasingly LNG-hungry countries were paying Indonesia, Qatar and other major LNG exporters for their product. Burgeoning U.S. LNG exports looked like a no-brainer, a sure thing, and that expectation was only reinforced when (in March 2011) Japan’s Fukushima disaster prompted a multiyear shutdown of dozens of nuclear units (with gas-fired power plants filling most of the power generation gap; see Spouse of the Rising Sun). Further reinforcement came from continued, fast-paced economic growth (and fast-rising demand for cleaner sources of power) in China and India, and from sky-high LNG prices. By early 2014, LNG prices in Asia were at or near $20/MMBtu—more than four times the price of natural gas at Henry Hub, and more than double what it would cost to deliver U.S.-sourced LNG to Asian ports.