US Seeks the Throne
July 2017
The US is rapidly adding liquefaction capacity and has the potential to dethrone Australia as the world’s top LNG producer by the mid-2020s. Two years ago, the US had essentially zero export capacity, but is now currently on track to possess a liquefaction capacity of 138Mtpa by 2025. The US LNG flood appears imminent, but when and where will it arrive?

US Ramping Up its Export Capacity

Within a decade, the US will have reversed its position as a net importer to potentially one of the largest, if not the largest, LNG exporters.

We forecast that the world will experience an LNG supply crunch between 2020 and 2022. The oil price crash in 2014 sent shock waves through the LNG industry and many projects were scrapped or indefinitely delayed. This lack of new developments will translate to stagnant supply growth between 2020 and 2022. After 2022, North America will be the primary source of LNG supply growth, and the US and Canadian LNG facilities will account for 70–80% of global liquefaction growth until 2025. However, American hegemony is not predestined. Sabine Pass currently has an export capacity of around 8Mtpa. Of the 130Mtpa of US capacity to be added, only 60Mtpa has passed the FID stage. In Canada, almost none of its planned LNG sites have passed the FID stage (Figure 1 & 2).

US LNG benefits from two major factors: the abundance of cheap gas; and, the infrastructure to capitalise and transport this gas. Whilst gas infrastructure is unlikely to go anywhere, the US’ cheap gas advantage may begin to waver. Henry Hub prices have been hovering around US$3.30/MBtu in 2017, 175% lower than prices across the Atlantic (NBP US$5.80/Mbtu) and 225% lower than prices across the Pacific (JLNG US$7.40/Mbtu).

We believe LNG shipments from the US will more likely affect the US gas market. The ability to export a once region locked resource will stabilise the Henry Hub price. We expect to see less seasonal variation in the Henry Hub price as the US exploits the summer-winter divide in its traditional market, the Americas. 



Where can US LNG Go?

In Europe, the United States must compete with many established players, including Norway, North Africa, and the Netherlands. However, its main competitor is Russia. Russia exports approximately 150Bcmpa to Europe with about 100Bcmpa of spare capacity available. We do not believe US LNG will be able to dislodge Russia from its dominant market position. (Figure 4) The key is that Russia can afford to cut prices to its European customers. Russia has among the lowest gas production costs in the world. For example, Gazprom offered Lithuania a 23% discount on its gas supplies when Lithuania constructed an LNG regassification station in 2014. Europe’s gas supplies from the North Sea, North Africa and the continent have all plateaued or are declining. We believe that the US will secure market share in Europe, but only because of Europe’s desire to maintain a diverse energy profile for security reasons.

In Asia, the largest LNG market in the world, US LNG’s prospects are a little brighter. Asia is still the predominate source of LNG demand (Figure 3). In June, Korea and Taiwan imported their first cargoes of US LNG, and we estimate that China and India will add approximately 90Mtpa of regassification capacity by 2025. The US is blessed with the gas reserves; however, its relative geographic isolation could weaken its economic potential. Australia and Qatar are much better positioned to exploit key Asian markets. Currently, US LNG exports can compete with contract-based Australian LNG in Japanese and Korean markets. However, importers are making moves to renegotiate restrictive long-term contracts. The world’s three largest LNG importers, South Korea's KOGAS, Japan's JERA, and China’s CNOOC have signed a memorandum of understanding to work towards getting more flexible LNG contracts. We believe US LNG could experience a similar situation in Asia as it does in Europe if renegotiations push the price of Australian and Qatari LNG cargoes lower.