U.S. Innovations Shift Global LNG Market
Posted March 12, 2018
Low U.S. natural gas prices have spurred liquefied natural gas (LNG) exports and major petrochemical projects that have become a springboard for U.S. jobs, wages, housing, education and services – everything that comes with major new capital projects and their broad-based boost to the economy. An important corollary is that U.S. technological innovation is translating into innovative business practices that are helping to increase the global trade, volumes and liquidity of natural gas markets while also advancing environmental goals by reducing greenhouse gas emissions in the power sector.
Oil markets transitioned decades ago to become global, and that enabled oil to become the backbone of the transportation sector. Natural gas is much more about heating, cooking and generating electric power than about transportation. But with an estimated 1 billion people around the world without access to electricity and heating and 2 billion without access to clean fuel for cooking, there’s a moral imperative to supply affordable and clean energy that improves human development worldwide and also helps meet environmental objectives. Natural gas is an important part of meeting these needs, and LNG is the technology that connects gas markets across distant continents.
LNG represents about 10 percent of global natural gas supply, and suppliers shipped enough LNG last year to power about 575 million homes, according to estimates from Royal Dutch Shell. Shell made headlines recently by warning of a potential LNG shortage as global natural gas demand has continued to exceed expectations, and many new projects were delayed or canceled due to low prices the past couple of years.
Some things that have not made headlines but are key indicators of LNG market trends were Shell’s observations that the average LNG contract length in 2017 was about seven years – almost half what it was on average between 2011 through 2014. Moreover, the average contact volume in 2017 was less than half what it was on average over the same 2011-to-2014 period.
Consequently, as LNG markets deepen globally, we’re seeing more and smaller transactions over shorter durations, plus an increasing share of spot sales to Europe and China. What this means is that with more buyers and sellers the market’s liquidity is increasing, which is essential for market forces to work and an indication that competition and efficient market pricing is taking hold. Consumers win when firms compete, and LNG is helping to connect regional natural gas markets, diversify the regional energy mix and security, and raise competition among fuels and suppliers.
In its 2018 energy outlook, BP projects global natural gas demand will increase by nearly 50 percent between 2016 and 2040. The chart below shows that the portion traded globally as LNG should rise by 40 percent in the next five years and more than double by 2040. The U.S. and Middle East (Qatar and Iran) are poised to contribute more than half of that supply growth. And by 2040 the U.S. could account for almost one-quarter of global gas production, which further reinforces the economic opportunities at home and the United States’ security and strategic role in global energy markets.
While the U.S. leads LNG supply growth, LNG consumption growth is predominantly in Asia, especially China and India. China’s recent contact with Cheniere (subscription required) reinforces the value of U.S. stability and security of supply. Susan Sakmar elaborates on the myriad ways in which U.S. LNG headed to China is a big deal and also highlights how the next wave of U.S. LNG export projects likely will need firm offtake commitments to proceed. In turn, this means that securing the U.S.’s energy future in global LNG depends in part on the path of U.S. energy policy to reinforce confidence in trade relationships and a long-run commitment to trustful energy interdependence. The future possibilities appear to be bright but are far from certain. With global LNG markets at a pivotal stage, the progression of U.S. energy policy, permitting and infrastructure as well as free trade policies will have much to say about the end game.
About The Author
Dr. R. Dean Foreman is API’s chief economist, specializing in energy and global business. With a Ph.D. in economics from the University of Florida, he came to API from Saudi Aramco Strategy & Market Analysis in Dhahran, where he managed short-term market monitoring and the long-term oil demand outlook. Foreman has more than 20 years of industry experience in corporate strategic planning, forecasting, finance / risk management and regulatory policy at ExxonMobil, Talisman Energy and Sasol North America.
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