The United States is rapidly becoming one of the world’s largest exporters of liquefied natural gas (LNG) as construction projects to convert former LNG import terminals into export terminals continue over the next several years. US gas liquefaction and export capacity already has grown from 2 billion cubic meters (bcm) in 2015 to more than 20 bcm thus far in 2017 and is likely to reach 90 bcm by 2020, making the United States one of the three largest LNG exporters along with Qatar and Australia. The 70 bcm of additional LNG export capacity US LNG exporters are likely to add by 2020 could match the LNG export capacity added by the rest of the world combined between now and 2020.
The steep rise in US LNG export capacity is driven by a number of factors, including most importantly the shale gas revolution in North America. The shale revolution, involving the use of advanced techniques in hydraulic fracturing and directional and horizontal drilling, is one of the biggest developments in the history of petroleum development and continues to push US gas production higher.
US gas production has increased every year since 2005, except for 2016, and the US Energy Information Administration forecasts another increase in 2017 to nearly 760 bcm. The US Energy Information Administration predicts further growth in US natural gas production of about 4 percent annually through 2020, about the same rate as from 2005 to 2016. This growth will continue to provide abundant domestic supply at relatively low prices. US natural gas prices at Henry Hub have hovered at about $3.00 per million British thermal unit (mbtu} in recent years and the US Energy Information Administration predicts this trend will continue at least through 2018.
Another key factor in the competitiveness of US LNG exporters is the relatively low capital cost of converting many of the former LNG import terminals in the United States into export terminals. The conversions mainly require the addition of liquefaction facilities. Most of the rest of the expensive infrastructure is already in place, including pipelines connecting the terminals to the US national pipeline network, LNG storage facilities, and port facilities to accommodate LNG tankers. Only one LNG import terminal is still operating regularly-the Everett terminal in Massachusetts. At present, only two export terminals are operating-at Kenai in Alaska and Sabine Pass in Louisiana.
Many more former LNG import terminals remain to be converted into export terminals in the United States, and some new-build terminals also are planned. The most certain new capacity will be provided by the projects already approved and under construction, most of which will be completed in the next two years. Nearly 65 bcm of new capacity is scheduled to be added in 2018 and 2019, including two projects that were planned for 2017 but have not yet started commercial operations.
Another major benefit for US LNG exports is the completion of the widening of the Panama Canal. Most US LNG exports will be shipped from terminals along the Gulf of Mexico, making the Panama Canal widening a much shorter and less expensive route to Asian markets. In July 2016, the first cargo of LNG to reach China from the Sabine Pass terminal sailed through the Panama Canal.
The importance of the Panama Canal to US LNG exporters’ access to world markets, especially Asian consumers, is highlighted by the distribution of US LNG exports since Sabine Pass started commercial exports in February 2016. Asia has been the second largest market for US LNG exports, accounting for 32 percent of US LNG deliveries. The western hemisphere is the largest market, accounting for about 40 percent of US export destinations. The remaining 28 percent is split fairly evenly between Europe and the Middle East. US LNG exports have already reached a total of 25 countries.
This diversity in US exports has been enhanced by a global trend toward greater LNG demand by relatively small importers who have installed smaller capacity, less expensive terminals called Floating Storage and Regasification Units (FSRUs) to help meet their gas import needs. These units use a specially equipped moored tanker to receive, store, and regasify LNG instead of newly built ports and onshore storage and regasification facilities. US LNG exports have been delivered to FSRUs in Egypt, Italy, Jordan, Kuwait, Lithuania, Pakistan, and the United Arab Emirates.
Thus far, all US LNG export cargoes have found willing buyers, but that may not continue as export capacity expands rapidly in the next two or three years. The projects currently under construction in the United States were approved by Final Investment Decisions (FIDs) in earlier years when global LNG prices were considerably higher than today. Although much of the new capacity in the United States is underpinned by long-term contracts, exporters will have to deal with lower prices, shorter contracts, and expanding spot sales at least in the short term.
Prospects for longer term growth in LNG demand remain robust, driven in part by the large economies of China and India as well as the spread of customers with small economies. A hiatus in FIDs for additional LNG export projects should also help demand keep up with projected supply. The United States has seen a sharp drop in decisions to move ahead on new projects not already under construction. Six new projects with a combined total annual capacity of 75 bcm approved by the US Department of Energy and Federal Energy Regulatory Commission (FERC) have not reached decisions. This is a sharp turnaround from earlier years, when approvals from the Energy Department and FERC were key factors determining the timing of new projects.
Geopolitically, growing US LNG exports will help integrate markets, diversify supplies, and enhance US and global energy security by increasing the flexibility and connectivity of global gas markets. Rising availability of LNG exports and more flexible markets has already contributed to flattening global gas prices and will help remove political leverage from producers that have supplied traditionally isolated markets, such as Russia. Already, US shale gas has been depressing Russian prices in Europe since at least 2009 by reducing US demand for imports.
US LNG exports could provide an opportunity for Europe to increase its gas supply diversity and security by establishing stronger market links with a major new supplier. The EU has released an LNG strategy and is funding new gas infrastructure to connect isolated markets, but much more needs to be done to complete missing links. Looking ahead, Russia’s plan to add two new pipelines to Europe, Nord Stream 2 and TurkStream, is likely to help increase its European market share. At a breakeven price of about $7-8 per mbtu at recent Henry Hub prices, US NGL is proving more attractive in non-European markets.
On a global basis, however, US LNG exports have thus far proved flexible and agile in finding and reaching diverse markets amid demand shifts and occasional rapid price changes. Growth in US LNG exports is likely to further boost the United States’ economic and diplomatic influence in international markets.
*Bud Coote is a senior fellow with the Atlantic Council. He previously spent 43 years with the Central Intelligence Agency where he helped establish the CIA’s energy program. He retired as the agency’s lead international energy analyst and a key adviser to US policy officials.