By John England
OVER the last 20 years, international natural gas trade has seen a continuous expansion of the role of liquefied natural gas (LNG) moved by ship.
There has been growth in the number and capacity of countries and locations liquefying gas, the number and capacity of specialised ships dedicated to the trade, the number and capacity of locations and countries receiving and regasifying LNG, and the physical amount of LNG traded.
Over the next decade, plans to continue expansion are well under way, primarily led by Australia and North America.
But the lower oil price environment of late 2014 and early 2015 raises questions about whether the LNG growth momentum can be maintained.
Lower oil prices translate into lower LNG prices, particularly in Asia where most of the market growth is occurring, and if long-term price expectations settle at a lower level than previously expected, what does this mean for investments in new LNG capacity?
In particular, Australian project developers need to pay close attention to LNG project development in North America, the major competitive source of growth targeting Asian markets.
Below are the factors I expect will drive the outlook for North American LNG exports, concluding that they are more resilient to changing market conditions than might be expected.
North American natural gas supply is robust in a lower price environment
The size of the North American natural gas resource base to satisfy ongoing demand growth at relatively moderate prices has been demonstrated by several recent studies and should give confidence to LNG buyers that the US, and North America more generally, are secure sources of supply, able to satisfy a growing domestic market as well as ramp up LNG exports.
For example, the 2014 Annual Energy Outlook from the US Energy Information Administration predicts that US natural gas production can grow by about 4 trillion cubic feet (Tcf), or roughly 83 million tonnes of LNG over the next ten years.
Of this, 3 Tcf (~62 million tonnes of LNG) will supply local markets and 1 Tcf (~21 million tonnes LNG) will go into the international LNG market.
LNG buyers signing long-term contracts usually seek assurances that sufficient natural gas can be developed over the life of the contract to satisfy their needs.
This is why most LNG developments are tied to upstream investment in particular fields where there is a high level of confidence in reserves.
North American gas supply is somewhat different in that natural gas for export will be sourced in a liquid market, priced at the spot price of the day, linked to the Henry Hub index.
The resilience of US natural gas production to a downshift in the price environment has been demonstrated over the past three years, as US natural gas production has continued to grow even as Henry Hub prices have adjusted downwards from between US$7 and US$8 per million British Thermal Units to between US$2 to US$3 per million British Thermal Units, providing real world reassurance of the reliability of US supply.
US LNG export projects are moving forward
In the United States, several LNG export projects, primarily along the Gulf Coast, have already obtained all required permits and will eventually contribute about 50 mmpta of LNG to the global market.
Although a large number of additional US LNG export projects are moving through the approval and permitting process, we expect significant attrition among proposed projects in the current price environment and, indeed, an accentuated level of attrition and/or project delay as project developers find it tougher to obtain financing and buyer contracts that ensure the projects are financially viable.
Several other projects are well advanced, and the recently announced combination of Royal Dutch Shell and BG Group, two major global LNG players, could well give additional momentum to finalisation of capacity development at Lake Charles in Louisiana, where BG Group has significant offtake agreements.
The deal will also give Shell access to a larger specialised LNG tanker fleet, increasing the flexibility of its LNG shipping options.
Western Canada also remains a significant location for the next wave of LNG project development in North America, and is geographically well-positioned to gain a position in supplying growing Asian demand.
North America’s future as a source of LNG supply to global markets is strong.
The momentum behind LNG export project development in North America has been driven by prospects for long-term natural gas demand growth, particularly in Asia, availability of natural gas supplies which can be grown and developed in excess of requirements from domestic markets, and a price environment which makes such
large-scale investments economic.
The first two of these conditions clearly remain strong in the long-term and will enable the first wave of US export projects to move ahead, as they are committed to do.
Expected continuing growth in Asia for LNG demand should also underpin market conditions which will enable additional capacity development in North America and other locations.
The long term growth in global LNG of the past 20 years is expected to continue, and suppliers from around the world will position their investments to meet the needs of these markets.