U.S. exports of LNG mark a turning point in the market

Sea change for natural gas
Sea change for natural gas

The first major U.S. LNG shipment for export launched this week right into an oversupplied global gas market.

Experts say the market could stay soft for several years, but even so, this first shipment of U.S. gas, sold by Cheniere, marks what is a new role for the U.S. in the global energy arena and could be a changing dynamic in the global gas market. When U.S. gas exports were first proposed, prices in other parts of the world were much higher.

An LNG carrier ship is docked at the Cheniere Energy terminal in this aerial photograph taken over Sabine Pass, Texas.
Lindsey Janies | Bloomberg | Getty Images

Chris Holmes, vice president global gas and LNG at IHS, said he expects the market to bottom out in 2018 and then tighten up again. "At the moment, we think in the current environment, nobody's going to invest in plants. We'll see it tighten up in the early 2020s. Then you start looking at opportunities."

Cheniere president of marketing Meg Gentle spoke to the CERAWeek energy conference in Houston on Tuesday, as Cheniere's first shipment was getting set to sail to Brazil.

"The U.S. will be one of the biggest three suppliers of LNG by 2020," she said, adding that U.S. liquefied natural gas exports should total about 8 billion cubic feet by then.

U.S. gas enters a world market already supplied by Qatar, and there is more new supply coming from Australia. "Over the next five years, Australia will triple LNG production," said Josh Frydenberg, Australia Minister for Resources, Energy and Northern Australia. He said Australia will overtake Qatar as the largest exporter.

But Gentle and others point out that U.S. supply is plentiful and cheap to produce currently.

"The near-term oversupply is masking all rational thinking about the long term," said Martin Houston, founder of Parallax Energy. Houston was also speaking at the CERAWeek conference, and he announced this week that he was launching a new company with ousted Cheniere CEO Charif Souki.

"Buyers are being cautious because they can be," he said, adding they have a view of cheap "LNG slopping about the system."

Cheniere's nat gas bet
Cheniere's nat gas bet

The attraction of the U.S. entry into the world gas market is not just about new gas supply, but that it could bring changes in pricing that some in the industry hope may spread to other markets, particularly in Asia. In Asia, some gas prices are still linked to oil, which could make them much more expensive relative to U.S. gas when oil prices are high.

JERA President Yuji Kakimi said the increased liquidity should result, not in a lower price but in more transparency in the pricing mechanism for gas. JERA is a utilities joint venture and major LNG buyer.

U.S. gas is based on Henry hub pricing, and the U.S. is the biggest producer of natural gas in the world. Kakimi told CNBC there are several possible hub locations in Asia, each with different advantages and disadvantages. Tokyo and Singapore are among them.

Gentle agreed a hub system would help. "We think all the big demand centers need to have pricing points," she said.

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Gentle also said she sees more potential markets than others expect, and she pointed to new growth in the Middle East. But she also said some potential buyers for the big gas projects are getting smaller and their credit quality is getting lower.

Kakimi doesn't see the demand some see.

"I really am suspicious about the optimistic view of LNG in the Southeast Asian market in the very near future," said Kakimi. He added that Japanese demand is peaking.

The new supply does give consumers more choice and more energy security.

Centrica CEO Iain Conn said Europe will be a beneficiary of additional LNG. "We have Russian gas competing with Norwegian gas competing with LNG competing with indigenous gas," he said.

Houston said U.S. LNG has its advantages. "It has the lowest volatility of any LNG one can contemplate," he said. By 2024, he said a quarter of the world's LNG could come from the U.S. He added that focus should be on 2020 to 2030 when thinking about new capacity capabilities.