Now poised for the biggest year ever in 2019, 2018 was a record breaking year for the emerging U.S. natural gas export business. Most recent U.S. Department of Energy data indicate that LNG exports hit a record of nearly 110 Bcf in November 2018. This is a 35% jump from November 2017, with so much more to come: “U.S. Liquefied Natural Gas Hits Record Highs Again. This year, we will pass Malaysia to become the world’s third largest LNG exporter (Australia could surpass Qatar to take the top spot).
Currently larger than U.S. LNG sales, although holding less potential, piped U.S. gas to Mexico was also up 10-12% year-over-year. Around half of this came from two areas in South Texas, Rio Grande City and Roma. Top ranked for a long time, however, Mexico is now second to South Korea in LNG purchases from the U.S. flagship LNG terminal Sabine Pass in Louisiana (China is third). Gas to Mexico adds $6-8 billion to the U.S. economy each year and is a critical outlet so our prices do not sink to unsustainable levels and put shale producers out of business. Total U.S. LNG exports should surpass piped supplies to Mexico later this year.
Outside of the shale revolution itself, burgeoning exports and thereby increased global competition for domestic users are perhaps the single largest transformation in the history of the U.S. natural gas market. Starting only in February 2016, U.S. LNG has already reached 33 nations.
With a massive low cost natural gas resource base, rising but not overly so domestic demand, record production, and the most efficient and competitive natural gas industry in the world, the future shines bright for U.S. gas exporters. These are a rapidly growing U.S. baseload market that are our largest source of new demand.
The U.S. now accounts for 65% of Mexico’s gas usage. More is surely coming because Mexico has booming gas demand amid falling domestic production. In addition, despite a whopping 550 trillion cubic feet of recoverable shale gas, Mexico’s new President AMLO has pledged to not allow large-scale fracking, a shale extraction technique that could yield significant domestic supplies within the next five years or so: “When Will Mexico Start To Frack For Natural Gas?” To be sure though, AMLO has contradicted and backtracked himself on a variety of energy positions.
We do know that Mexico is trying to get away from U.S. LNG because it is 50-60% more expensive than piped supplies from Texas. Higher cost energy is a particularly destructive force for a country where half the people are poor. Additional U.S. funding for more border pipelines is expected.
But, there has been surprisingly strong resistance from environmental and indigenous rights groups in Mexico against the required pipeline build-out. And narco traffickers siphoning off billions of dollars in products from pipelines is compromising the integrity of the transmission system. Now, state-utility CFE owes billions of dollars to the firms building the pipelines, despite them being incomplete and unable to deliver gas.
Turning to U.S. LNG, decarbonization efforts around the world will mean more natural gas. LNG demand is set to rise 6-9% over the next few years, and experience non-stop growth for as far out as major forecasting bodies are modeling. This surge in consumption could quickly reverse the global LNG market from a current 3-4 Bcf/d surplus to an equivalent deficit within five years.
To be ready, those U.S.-based projects hoping to pass their Final Investment Decision process this year will need to be green lighted soon to meet this approaching global supply shortage. It takes a number of years to bring an LNG export terminal online.
With leaders from both nations meeting this week, the U.S. trade war with China has been a burden for our LNG industry. In November, U.S. LNG shipments to China were just 6.6 Bcf, compared to a peak of 24.6 Bcf in October 2017. If a deal cannot be reached, the tariff could be increased on March 1 when the current truce is scheduled to end. U.S. President Trump, however, has now indicated a willingness to extend the deadline if need be.
Unfortunately, India, the second main incremental demand market, is not nearly as substantial as China. Last year, with no purchases in August and November, India took in a monthly average of just 6.5 Bcf in September and October. Yet, energy-deprived India remains a prime target and is building out the infrastructure to import 9-12 Bcf/d of LNG over the next 10 years. Slow growth and a nuclear restart could slow LNG in Japan and South Korea.
Although not as fast growing as China and India, Europe will remain a focus for U.S. natural gas shippers as well. Better late than never: “Germany set to have at least 2 LNG terminals.” And last month, Northwest Europe offered the strongest netbacks to U.S. LNG sellers, with the UK netback to Sabine Pass averaging around $3 per MMBtu.
Already accounting for nearly a quarter of all internationally traded gas, Russia though will remain stiff competition for the U.S. Both the Nord Stream 2 (Russia to Germany) and Turk Stream (Russia to Turkey) gas pipelines should be completed this year. In addition, the massive 3.7 Bcf/d Power of Siberia gas pipeline connecting Russia to China is also set to be completed this year. Russia also has a grand LNG strategy that must not be underestimated by those in the U.S. Congress wanting to buffer Mr. Putin’s influence.
Policy support matters greatly for U.S. gas export prospects. Wisely, given that LNG exports enjoy bipartisan support, project approvals have been getting quicker, although still not quick enough. FERC and PHMSA have been better coordinating the LNG review process since their MOU was signed on August 31. Indeed, “U.S. LNG: here comes the second wave.“