On May 17, 2013, the US Department of Energy (DOE) conditionally authorized the export of up to 1.4 Bcf/d of domestically produced liquefied natural gas (LNG) from the Freeport LNG Terminal on Quintana Island, Texas, for 20 years.This is the first decision on a long list of applications awaiting DOE approval to export LNG to countries without Free Trade Agreements (FTAs). Including the liquefaction capacity already under construction, the proposed US terminals have announced LNG offtake agreements of a combined 7 Bcf/d.
“We believe that as much as 5-10 Bcf/d of LNG export capacity could be developed in North America this decade,” Barclays said in a report on North American gas.
The race to build LNG export facilities in the US comes against a backdrop of a rapidly changing global LNG market. Global LNG trade has grown 38% in the past five years, and Barclays' analysis suggests the next five could post similar growth.
With the vast majority of the upcoming liquefaction capacity already contracted, mostly by Asian end-users, a repeat of the 2009-10 oversupply is unlikely, in Barclays' view. Barring a broad collapse in global gas demand as a result of an economic slowdown, the global LNG market should be largely balanced in 2015-17, it said.
Meanwhile, Asian buyers are most likely to seek long-term supply commitments as the relative scarcity of local natural gas production necessitates a greater focus on the security of LNG supply.
However, the emergence of China and India as large LNG buyers introduces a greater price-sensitivity to the region’s LNG needs: unlike Japan and Korea, both China and India have indigenous natural gas production, as well as access to imports of pipeline gas.
While the need for LNG cannot be eliminated, the price at which LNG can be procured will be competing with possible alternative supplies.
Gas-on-gas price competition has developed most starkly in Europe, where pipeline gas supplies have faced the pressure of growing LNG imports and have ceded some pricing power as a result. Europe’s appetite for LNG imports has recently been dampened by lacklustre demand as a result of a broad economic slowdown.
It is also increasingly dependent on the relationship between oil-linked pipeline gas prices and spot and short-term LNG ones. If European gas demand rebounds, the cheaper of the two will likely be the first to provide additional supply.
Latin American consumers are unlikely to seek large long-term supply commitments. Brazil’s LNG needs have varied greatly with the swings in available hydro generation and the country has procured most of its LNG supply on the spot market.
Argentina has procured cargoes through tenders with relatively short durations. Mexico has long-term supply contracts for some of its LNG imports, but recently has also relied on issuing shorter-term tenders. Mexico is also expanding its capacity to import pipeline gas from the US, and the country’s LNG needs may wane as imports from the north increase.
The shorter-term nature of Latin American LNG purchases has made the region a driver of spot and short-to-medium term LNG prices.
The global LNG market is set to grow considerably in the medium term. What impact will that have on prices? While liquefaction capacity additions are exceptionally large and could nearly double production in seven years, the list of regasification terminals under consideration suggests that there is an even larger appetite for LNG demand.
Note that while liquefaction facilities are usually heavily utilized, regasification terminals seldom run at high rates utilization rates around the year.
The long lead times of liquefaction projects dictate a considerable level of foresight for the global LNG markets, and output from new liquefaction projects is unlikely to flood the spot market and cause prices to collapse.
Source: Barclays