For the first time since the Frisbee made its debut and the U.S.S.R. launched Sputnik into orbit, U.S. exports of natural gas surpassed imports, the U.S. Energy Information Administration (EIA) reported this week. The achievement, 60 years in the making, precedes a swift ramp-up as a bevy of new facilities and LNG export terminals coming online will almost triple liquefaction capacity by the end of 2019.
The expansion of U.S. export capacity will face a global market in flux as countries increasing their use of natural gas grapple with ways to obtain it. While the current structure relies on massive facilities and long-term contracts, the future LNG business model could be far more freewheeling, with a global fleet of LNG-laden carriers roaming the seas and pivoting toward regasification facilities in need of supply. In this scenario, long-term contracts would give way to spot market prices.
At least that is part of a future envisioned by Charif Souki, chairman of Tellurian Inc. (NASDAQ: TELL) and trailblazer of the U.S. LNG export business. But natural gas exports are not simply the result of demand, he said at the recent CERAWeek by IHS Markit conference in Houston. The supply side drives it as well, specifically the production of crude oil.
“You have people who are like legends in the business like Mark Papa [CEO of Centennial Resource Development Inc.] telling you that, for their oil production, the thing that scares them the most is, what are they going to do with the gas?” he said during a panel discussion on the evolution of global gas models.
Announcements from Chevron Corp. (NYSE: CVX) and ExxonMobil (NYSE: XOM) about expansions in crude production in the Permian Basin will also result in enough associated gas to match the entire capacity at Sabine Pass, La., the LNG export terminal of Souki’s old company, Cheniere Energy Inc. (NYSE MKTS: LNG), he said. Either Permian producers find an export solution in the next five years, he said, or there will have to be a cap on oil production because gas cannot be flared off in the U.S.
Of course, LNG is not the only option for U.S. exporters. Natural gas pipeline capacity to Mexico has increased to 11.2 billion cubic feet per day (Bcf/d) as demand has expanded from the country’s power sector and pipelined gas beats LNG for price, the EIA said. Another 3.2 Bcf/d of capacity is on track to come online in 2018 and U.S. exports to Mexico have more than doubled to an average of 4.2 Bcf/d since 2014.
The EIA projects that growth in pipeline exports to Mexico, as well as LNG export capacity, will keep the U.S. as a net exporter of gas every month through the end of 2019.
Souki’s vision of a business model on the verge of leaning toward spot prices was not shared by his fellow panelist Hendrik Gordenker, chairman of JERA Co. Inc. which is a joint venture between Tokyo Electric Power Group and Chubu Electric Power Group. Gordenker said that long-term relationships count for a great deal.
“They will ensure that long-term investments are made, that supply will be available,” he said. “At the same time, we are putting much more emphasis on short-term, medium-term and spot transactions.”
But he is not ready to commit to picking up the phone and purchasing LNG off the nearest carrier. For one thing, quality varies. Also, Japan imported about 11 Bcf/d in 2017, more than any other country and more than double that of the No. 2 importer—China. Long-term contracts ensure a steady supply as opposed to a spot market.
JERA is interested in developing a commodity-type market for LNG, Gordenker said, particularly one that offers transparency.
Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.
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