An ugly combination of sagging overseas demand for liquefied natural gas (LNG), new LNG supply coming online in Asia and cheaper oil dragging down prices has taken some wind out of the sails of U.S. LNG export prospects. After all, the LNG export boom was premised on rising world LNG demand and the pricing of gas at Henry Hub natural gas levels—a welcome alternative to traditional suppliers indexed to what used to be higher cost oil. The question becomes, will these setbacks just slow the pace of new LNG export projects in the U.S., or will the potential market be limited to the projects already locked in? Today, we consider recent developments and what they mean for LNG export projects—and U.S. natural gas producers.
Not so very long ago, the LNG export market looked like a sure-thing winner. Worldwide demand for LNG was rising and expected to continue on the upswing; buyers in Asia (by far the largest market for LNG) were looking to diversify their fuel sourcing and break their reliance on oil-indexed LNG deals; and the margins for moving cheap, U.S.-sourced gas into high-priced LNG markets overseas were expected to be fat and lucrative (see Courtesy of the Red White and Blue). In the past year or so, though, spot LNG prices have collapsed (to about $10/MMBTU—many say less, a few say more) as demand slumped (for economic, weather and other reasons), new LNG production (from Papua New Guinea LNG and Queensland Curtis LNG in Australia) entered the market, and the oil-indexing of LNG contracts has led to those oil-based term prices falling as well. The end result: LNG margins look very thin indeed. How does this all affect the prospects for U.S. LNG exports? Will there be only a subtle pause in new LNG export projects, or will the projects that get built be limited to those already under construction?
U.S. gas producers for some time now have been counting on LNG exports to absorb a hefty portion of the increasing volumes of gas they produce (see Golden Years). And, in anticipation of LNG exports, plans are in the works to add new gas pipeline capacity and to reverse pipeline flows so Marcellus/Utica and other gas can be transported to planned LNG export terminals—most of them along the Gulf Coast (see 50 Ways to Leave the Marcellus). An initial round of LNG projects—we’ll call them the First Four—are still moving forward: Sabine Pass and Cameron in Louisiana, Freeport in Texas and Cove Point in Maryland (see white diamonds in Figure #1). These four share three important characteristics. First, they’re being constructed at existing LNG import terminals with strong pipeline connections (thereby reducing project costs and making them more economic). Second, they hold long-term sale and purchase agreements (SPAs) for all--or nearly all—of their liquefaction and export capacity, and the SPAs are take-or-pay (thereby making the projects financeable). And third, they got in under the wire, before the energy-market upheavals of the past few months forced LNG buyers (and investors and lenders) to re-examine things.