The liquefied natural gas (LNG) industry has been around for about fifty years and has grown considerably in recent years. Today, the industry is exerting its energy dominance in the global energy market. Case in point, the LNG market has quadrupled over the past two decades and is set to double in the next two decades.
The US LNG market
At the forefront of the growing LNG market is the United States, as the world’s largest gas consumer and producer. By 2022, the US is projected to produce more than one-fifth of all gas output worldwide, mainly due to the growth of the US domestic shale industry. The US also is expected to increase production by 45 percent between now and 2022. One of the world’s largest gas fields and the largest source of natural gas in the US is the Marcellus Shale field which encompasses 104,000 square miles and stretches across Pennsylvania, West Virginia, and into southeast Ohio and upstate New York.
According to the IEA’s 2017 Gas Report, the number of countries consuming LNG rose from 15 to 39 between 2005 and 2016. Whether these countries remain long-term consumers or buyers will depend on pricing competition. Some analysts suggest that the US production and export of LNG will change the international gas market as it diversifies supply, challenges traditional business models and suppliers, and transforms global gas security. Further, the abundant availability of US LNG is creating new competition with pipeline gas supplies, and that in turn could benefit consumers by loosening the pricing and contractual restrictions that have characterized overseas gas trade in the past.
Expanding US LNG exports into international markets may help to accelerate this change and increase the liquidity and flexibility of the LNG trade. Not being linked to or restricted to exclusive arrangements with specific destinations or countries ultimately will encourage more open-market trade. In North America (US, Canada, Mexico), it is anticipated that demand for natural gas will surpass 35 trillion cubic meters by 2022, representing one-fourth of total global gas consumption, again, led mostly by the industrial (vs. consumer) sector.
State of the European LNG market
Domestic gas production in Europe is declining and may see growing competition between LNG imports and pipeline gas, creating future supply uncertainties. While we are seeing plenty of LNG supply capacity under construction (in the US and Australia, for example), there is yet demand in Europe to meet those supplies. In Europe, LNG will be competing with pipeline gas from Russia, Norway and Algeria, and should there be insufficient demand, the LNG supply for Europe will have to be reevaluated.
The demand for gas consumption from the industrial sector in developing countries is expected to surpass the demand for power generation overall. As mentioned, new LNG exports coming from the US to meet this growing demand are creating a major transformation in the global natural gas market. Of the 90 percent of anticipated growth in demand over the next five years, this will in large part be led by China’s industrial sector generating the demand and accounting for half the total forecasted growth in consumption.
Asia in general
Since 2016, nearly 35 percent of all US LNG has been exported to Asia. By using natural gas, Asian countries are making inroads to reduce their dependence on coal, the use of which is contributing to increasingly problematic air pollution. Now is also a good time for Asian markets to diversify because local gas prices there are almost as low as they are in the US, after being 4-5 times higher just a few years ago. Plus, US supplies reaching Asia are now more feasible due to the 2016 expansion of the Panama Canal which decreased shipping times and prices. Asia (including India) accounts for approximately 70 percent of global LNG demand.
Presently, the only LNG export facility in the US is Cheniere Energy's Sabine Pass in Louisiana, with other terminals being planned or under construction along the Gulf Coast and in Maryland.
China’s LNG exports increased 35 percent in 2016. Australia and Qatar supply 20 percent and 35 percent (respectively) of China LNG imports. However, there have been some constraints with these exports: Australia is facing a domestic supply shortage that may preclude a decrease in LNG exports; and Qatar’s export capacity is expected to shrink. Neither possesses the considerable production potential of the US natural gas industry in size and scope.
Among the major Asian nations, LNG imports look like this:
- China – 12% of global LNG imports
- India – 8%
- Japan – 39% - Japan’s position as the world’s largest importer of LNG is declining due to a shift in their energy focus to nuclear- and coal-generated power. Many of Japan’s contracts with Qatar are ending in the early 2020s, and may signal a willingness to work with US LNG export opportunities there.
Global gas demand
Undoubtedly, US participation in the global LNG market will transform the industry. As such, I would be remiss not to also acknowledge that China has some of the highest shale potential in the world, but currently is focusing their attention on solving large-scale water and infrastructure shortages.
In the next five years, gas demand worldwide is expected to grow by nearly 2 percent per year. Even though US gas production fell overall in 2016, the output from the Marcellus Shale field continued to grow, underscoring the ability of US gas drillers to counter the effect of lower prices by improving efficiency and producing more gas with fewer rigs. With the increasing production of US natural gas from the Marcellus and Utica Shale fields (the Utica shale field underlying much of the northeastern US and possibly holding the world’s largest single accumulation of natural gas), US natural gas output is expected to grow by nearly 2.9 percent per year by 2022 to satisfy domestic demand and liquefying the remainder for LNG export.
Australia currently is the world’s largest LNG exporter, with over AU$200 billion in new and existing projects. In the past decade, Australia has gone from one of the world’s lowest-cost LNG exporters to one of the highest. As a result, many Australian projects may no longer be competitive in the global market. Further, with regards to Asia exports, LNG supplies from green-field projects in Australia are likely to become 30 percent more expensive than from brown-field projects in the US. This may further advance US entry into the global LNG export market, along with its other advantages: the ability to tap the largest and most accessible LNG market in the world; possessing the most extensive pipeline infrastructure; having a large and experienced work force in the Gulf; capitalizing on the ability to utilize many of the best engineering, procurement and construction contractors in the world residing in the US; greatly reduced project completion risk; reduced political stability risks compared with other countries; and the lowest currency risk of any country.
On the supply side, new sources of demand have emerged all over the globe, including in countries that were not previously expected to import LNG, such as South Africa and Uruguay. Some estimates indicate that LNG demand from Thailand and Vietnam alone could grow by as much as 900 million cubic feet a day every year for the rest of the decade. Several countries in the Middle East also may become significant importers.
For the United States, LNG exports represent a significant opportunity for the US LNG industry—along with the growing demand for natural gas domestically—driven by increasing consumption from the industrial sector. With more than half of all US production over the next five years expected to be liquefied for export outside North America, the IEA (International Energy Agency) hints that the US could potentially challenge Australia and Qatar to become the world’s leading LNG exporter by the year 2022. Ten years ago, this possibility was unthinkable. However, the agreement between the world’s two largest economies and the demand of energy consumers worldwide, has helped create a second wave of investment in US LNG terminals. Plus, under the Paris Climate Accord and other environmental policies concerning energy, natural gas comes out as the most widely accepted energy source and import/export practice.