SYDNEY -- Australia's expected ascendancy to global leadership in liquefied natural gas exports by 2019 could be short-lived, with rival suppliers in the U.S. on track to lift their own gas exports substantially in the 2020s on the back of an expected American energy boom driven by the new administration of President Donald Trump.
Over the next decade, what the International Energy Agency calls "footloose" U.S. cargoes will dramatically shake up global LNG trade, putting pressure on prices and forcing changes in how contracts are struck. In its latest World Energy Outlook, the IEA says it expects more flexible prices and terms in the LNG market -- a "marked change" from the previous system of strong fixed-term relationships between suppliers and customers.
U.S. competition is likely to have an impact on key suppliers such as Australia, which sells all its LNG exports on long-term contracts to power utilities in Japan, South Korea, China and Taiwan. Other new LNG supplies from Southeast Asia, Africa and Russia could give buyers even more flexibility.
In a recent report, consultancy Deloitte identified the advent of U.S. LNG exports in 2016 as a "landmark moment" in global LNG trade. It said the U.S. can be competitive in global markets over the long term and initiate new types of contracts. Similarly, oil and gas major BP said on Jan. 25 in its 2035 Energy Outlook that it foresaw a globally integrated LNG market, anchored by U.S. gas prices. It said Asia would remain a big market for LNG, with China, India and Southeast Asia joining Japan and South Korea as major gas consumers.
Global demand, now at about 300 million metric tons, is expected to reach 400 million metric tons between 2025 and 2035, according to a recent forecast by the IEA.
For now, the Middle Eastern state of Qatar is the world's biggest and lowest-cost LNG exporter, shipping 77 million metric tons a year. It has a moratorium on adding more capacity, meaning it will probably relinquish the No. 1 spot to Australia in 2018-19. That is when seven big LNG projects costing a total of 200 billion Australian dollars ($152.7 billion) are expected to reach maximum output at Gladstone in Queensland, and in Western Australia and the Northern Territory. Assuming they come on stream smoothly, they will push Australia's annual output of exportable LNG to more than 80 million metric tons.
Those projects are backed by global majors such as Shell, Chevron, ExxonMobil, ConocoPhillips, Total, Japan's INPEX Corp. and Australian companies Woodside Energy, Santos and Origin Energy.
The scale of the recent investments -- and cost blowouts -- in Australia's LNG industry are immense. An example is the Chevron-led $54 billion Gorgon plant at Barrow Island off Western Australia, which is expected to be producing at its full capacity of 15.6 million metric tons a year (mtpa) later this year after it commissions its third processing train in the next few months.
Another big Chevron-led project in Western Australia, Wheatstone ($34 billion, 8.9 mtpa), is due to ship first gas by mid-2017. It will be followed in 2018 by Shell's Prelude Floating LNG project and the Darwin-based INPEX-Total Ichthys project. The three projects at Gladstone on the Queensland coast -- GLNG, APLNG and QCLNG -- account for another 24.5 mtpa.
For now, most of the LNG supply from Australia and Qatar is sold on long-term contracts to power utilities in Japan, South Korea, Taiwan and China. Japan is by far the largest customer, taking 48% of Australian LNG in 2016. India and Southeast Asia are expected to be big future buyers.
Pricing is crucial, particularly for buyers in India and China. LNG prices soared above $20 per million British thermal units (mmbtu) in 2014, then collapsed to about $4/mmbtu in the first half of 2016. They have strengthened recently, driven by a cold Asian winter that pushed the LNG spot price to $8/mmbtu in early February. The benchmark U.S. gas price, known as Natural Gas Henry Hub, is now about $3.60. Liquefaction (chilling and compressing gas into LNG), transporting it to Asia and regasification adds another $3-5 to costs. That makes for wafer-thin margins at best.
Increased competition from the U.S. and suppliers in Papua New Guinea, Africa, Russia and Southeast Asia will all add to pressure on spot prices in coming months. IEA Executive Director Fatih Birol noted recently that global gas markets were "well supplied" and the diversification of supply sources was improving security of supply.
Under current calculations, Australia may hold the top LNG export spot for about five years before American suppliers, buoyed by renewed enthusiasm in the oil and gas industry under the Trump administration, overtake it as new LNG export terminals on the Gulf of Mexico and Atlantic coasts come onstream.
The resurgent North American shale gas revolution, allied to a dense network of domestic pipelines, technological expertise, a skilled workforce, deep pools of capital, and proximity to high-growth markets such as Latin America, points to the U.S. becoming a significant force in global LNG trade over the next decade.
In its January LNG report, Deloitte said the American experience was in marked contrast to Australia, where its mega-projects had been "burdened with high and rising costs, schedule delays and competition for scarce resources."
The U.S. has exported small amounts of LNG from Alaska since 1969, mainly to Japan, but nothing from the lower 48 contiguous states in 50 years until Cheniere Energy's Sabine Pass facility in Louisiana shipped its first LNG in February 2016. All told, the U.S. is likely to have 30 million metric tons of export capacity by 2018, and as much as 75 million metric tons by the early 2020s.
Cheniere alone is building five processing trains at its $20 billion Sabine Pass terminal, with the fifth train due to begin producing in 2019. That will give it between 22.5 and 25 million metric tons of capacity in total.
Dominion's 5.75 mtpa Cove Point terminal in Maryland is expected to begin shipments in December this year. Another four export terminals -- Corpus Christi, Cameron, Freeport and Lake Charles -- are under construction on the U.S. Gulf Coast and will come on line in 2018, and another 10 to 15 projects are awaiting final investment decisions this year or next. While the U.S. projects are pushing ahead, several large LNG export proposals in Canada have been deferred indefinitely, including Shell's LNG Canada, Petronas' Pacific NorthWest and Chevron's Kitimat LNG projects.
Most of America's LNG will go to Latin America and Asia, with some to Europe. In the first 11 months of 2016, for example, the biggest buyers of Cheniere's LNG were Chile, Mexico, India, Argentina and China, accounting for two-thirds of all purchases. Australian energy research company EnergyQuest reported recently that nine of the 12 shipments from Cheniere's Sabine Pass in December 2016 "overwhelmingly" were heading to North Asia, reflecting cold winter demand there and higher LNG spot prices.
Energy analyst Wood Mackenzie said in late January that with global LNG supply increasing by more than 10% in 2017, prices are likely to "soon come under pressure." While the market inevitably would be oversupplied initially, it would be likely to tighten after 2019, it noted. "Higher Asian LNG demand, lower European domestic production and higher coal prices, all combine for higher LNG prices, particularly in Asia," it said.
In its 2017 Energy Outlook, BP said the rapid expansion of LNG from 2015 to 2035 was likely to lead to a globally integrated gas market. It predicted that global LNG supplies would grow strongly at 1.6% a year -- faster than oil and coal -- and would be led by the U.S. with 19 billion cubic feet a day and Australia with 13 billion cubic feet a day. That equates to 142 million and 97 million metric tons a year, respectively.