US LNG exports have been one of the most talked about themes in global gas over recent months. In August 2012, the Houston-based energy company, Cheniere, gave its engineering contractor the green light to construct two liquefaction trains--with production capacity of around 9mmtpa--at its Sabine Pass terminal in Louisiana. This moves the US one step closer to becoming a major exporter of the commodity through turning natural gas from booming US shale fields into LNG. The first liquefaction train is expected to start operating as early as 2015. The second train will start six to nine months later, the company said in an announcement.
The Sabine Pass terminal is first in line, but there is over 150mmtpa of US export capacity proposed from more than 15 projects. Wood Mackenzie forecasts Asian LNG demand to grow by over 115mmtpa over the next 10 years to 2022, accounting for 70 percent of total global growth. Given the potential size of US exports and requirement for Asian imports, it is no surprise that Asian buyers have been actively involved in several potential projects under consideration. Korea Gas Corporation (KOGAS) and GAIL India have signed deals for LNG from the proposed third and fourth train at Sabine Pass, and numerous Japanese companies have sought to tie up supply from other projects, including Cove Point, Cameron and Freeport. In light of all this activity, exports of US LNG to Asia seem a near certainty.
Singapore and South Korea appear to be in a prime position to benefit from this development. They are the only Asian markets to hold Free Trade Agreements (FTA) with the US--an important fact as exports for some US projects may potentially be restricted to FTA countries, of which there are only 19. The potential role for US LNG in Singapore's energy mix is enhanced as Singapore's current LNG aggregator, BG Group, also holds a contract for exports from Sabine Pass. In another development, Singapore's state investment fund, Temasek, gave US LNG exports a vote of confidence by investing into Cheniere, the developer of Sabine Pass.
The outlook for US LNG to figure strongly in Asia and Singapore's fuel mix seems positive, but several uncertainties that could impact the broader scale of US exports to Asia remain. These uncertainties are pertinent to the medium-term prospects of North American LNG arriving in Asia, and they continue to be discussed by policymakers and business leaders at international and regional forums, such as at the upcoming Singapore International Energy Week (SIEW) in October.
Firstly, not all of the potential projects in the US will be developed. Most will still need to pass numerous hurdles such as finding buyers, gaining financing, and overcoming technical and environmental challenges. In addition, US projects may face some more specific requirements such as requirement for FTA licences to export.
Secondly, much will depend on the price of future US exports. This will be driven both by capital costs, with brownfield projects enjoying an advantage, together with the differential between US and Asian prices. Wood Mackenzie expects the current wide spread to narrow over time, as Henry Hub prices rise gradually but consistently, while LNG supplier competition is expected to moderate Asian prices. Such a development would reduce the competitiveness of US projects and their consequent attractiveness to Asian buyers.
Thirdly, the requirement for Asian buyers to lock in medium-term volumes may see roll-overs of existing contracts. Indeed, security of supply is a critical consideration for some Asian markets such as Japan, the world's largest LNG market. While Japanese companies are undoubtedly seeking to benefit from the flexibility and potential lower prices of US exports, they are likely to still place a strong value on the certainty that long-term contracts with traditional suppliers offer.
Finally, US projects will face competition for market from other new projects. Supply competition will come from brownfield expansion in Malaysia, Indonesia, Australia, Papua New Guinea and from new proposed LNG projects in Mozambique, Tanzania, Australia, Russia and Canada, among others. Some of these projects will have some perceived potential advantages, such as a location closer to key Asian markets.
In conclusion, the potential scale of US LNG is vast, and the economics currently attractive. However, exporting to Asia will ultimately be limited by possible US regulatory hurdles, narrowing price differentials, and numerous competing sources of supply.
Nicholas Browne is a Gas Analyst at Wood Mackenzie. Wood Mackenzie will be presenting at the Singapore International Energy Week (SIEW)'s Gas Asia Summit. To find out more about the Energy Research Firm's LNG analysis, please visit www.woodmac.com/lng.
BY: Nicholas Browne, Wood Mackenzie
