Evolution - How LNG Exports Came to Dominate U.S. Natural Gas, and Where the Market is Heading

It’s well understood today that the U.S. natural gas market turned from potential domestic shortages to major LNG exports thanks to the Shale Revolution. What is not so well remembered is that the dramatic shift in the U.S. gas market wasn’t widely understood at the time and took several years to be accepted by the energy industry. In today’s RBN blog, we turn our attention to the beginnings of the Shale Revolution and how it allowed the U.S. to evolve into the world’s largest LNG exporter. 

Every day, crude oil producers on Alaska’s North Slope re-inject nearly 7.8 Bcf of natural gas into their wells, enough gas to supply the entire U.S. West Coast—California, Oregon and Washington State. If only there were some way to monetize that gas supply, to move it to market. The problem is that there isn’t, at least in today’s gas/LNG market, which is characterized by ample supply and relatively low prices. This same market also favors infrastructure projects that are simple and low-cost; no one wants to make multibillion-dollar commitments when natural gas prices and margins are so low. Today we conclude our series on the tough times ahead for Alaska’s energy sector with a look at the state’s vast natural gas reserves and the challenges associated with tapping them.

Of the 10 Bcf/d, or more than 75 MMtpa, of nameplate LNG export capacity currently operational in the Lower 48, Japanese companies form the largest single group lifting U.S. cargoes. Their commitments total ~2 Bcf/d of U.S. liquefaction capacity. However, Japan’s LNG consumption has been falling over the past two years, and in 2019 and 2020, U.S. LNG accounted for only 0.6 Bcf/d and 0.8 Bcf/d of Japanese imports, respectively, or about 20% of the country’s total LNG demand in each year. In other words, Japanese companies have made commitments for incremental LNG from their remotest supply option against a backdrop of falling domestic demand. In all cases, the Japanese players have opted not to buy FOB from producer projects, but instead have booked capacity at the Cove Point, Cameron, and Freeport LNG export facilities — all plants that require offtakers to secure and transport the feedgas supply for LNG production. This type of arrangement carries with it the need to set up gas trading desks in the U.S., with front-, middle- and back-office personnel, plus operations staff, representing additional fixed costs. What was the motivation for these commitments, made by no less than seven of Japan’s major LNG buyers, how successful have they been, and what lies in store for these volumes that the country does not appear to need? Today, we look at where these volumetric commitments fit, not only in the portfolios of the capacity holders but within the broader context of LNG commerce and commoditization.