By Irina Slav
In a world awash in LNG, any news about more production capacity sounds illogical. Nevertheless, this is what U.S. energy companies are doing: they are boosting their production and export capacity despite a plunge in exports over the past few months.
Are they burying themselves in billions worth of liquefaction trains that will never return the investment, or are they cleverly playing the long game?
U.S. LNG export capacity was three times that of the actual exports last month, the Energy Information Administration said earlier in August. These have been falling since February, faster and faster, to reach just 3.1 billion cu ft per day from the February record-high of 8 billion cu ft per day.
Of course, the biggest culprit was the coronavirus. The pandemic-prompted lockdowns did to natural gas demand pretty much what they did to oil demand, further depressing already depressed prices and compromising the competitiveness of U.S. liquefied gas.
Even so, producers are expanding.
Cheniere Energy, the biggest U.S. LNG exporter, said earlier this month that it planned to complete the sixth liquefaction train at the Sabine Pass terminal in 2022 rather than 2023, Reuters reported recently. Kinder Morgan is putting the finishing touches to the ninth train at its 10-train Elba Island facility. And Pembina is fighting legal challenges in the path of its Jordan Cove LNG project, the first LNG export facility on the U.S. West Coast. All this despite dozens of canceled cargos and an uncertain outlook for gas demand.
The International Gas Union, for instance, is optimistic. While it acknowledges that the pandemic will wipe out some demand for gas this year, it expects to see a quick rebound as soon as 2021. While it expects LNG exports this year to decline by 4.2 percent, these should rebound quickly, too, in 2021, thanks to low prices and the drive for lower emissions that is likely to spark increased use of gas instead of coal and oil. Prices are the key, the IGU’s report says.
“LNG prices are now far too low for U.S. exporters to make any profit, prompting many to simply shut off,” energy finance analyst Clark Williams-Derry from the Institute for Energy Economics and Financial Analysis told CNBC earlier this month. “It is not so much that the coronavirus crisis is going to last for a long time, it is more that the ‘new normal,’ post-Covid, may be one in which the U.S. LNG export dream seems out of reach,” he added.
Williams-Derry was the co-author of a IEEFA report about U.S. LNG’s future released in July which noted that the current fundamentals and price context has put the future of planned LNG capacity in question as buyers are increasingly reluctant to make the long-term commitments necessary for these projects to proceed. And yet, even the current LNG export capacity may already be too much.
In June, Tellurian, the company behind the planned Driftwood LNG facility, said it would make the final investment decision on the project in 2021. The delay, Tellurian said, was due to unfavorable prices. The company needs gas prices—specifically, Asian spot market prices—to be over $5 per million British thermal units (mmBtu). Right now, LNG trades at about $2 per mmBtu. Can it climb more than 100 percent within a year?
Unfortunately, this is hardly likely. The latest news from the key Asian market was a warning: China will not be gobbling up the world’s LNG this winter. The country has stocked up on cheap LNG already, and its storage space is tight, so the usual buying spree in anticipation of the heating season is unlikely to take place this year, Bloomberg reported earlier this week, citing analysts.
“There is a big question about whether demand will recover enough in September and October to digest the almost-full gas storage while pipeline imports resume,” Wood Mackenzie analyst Miaoru Huang told Bloomberg. “There will be no room for more injections to underground storage by early September.”
Yet, U.S. LNG exports are set for a rise this month, based on gas flows into liquefaction facilities as reported by Reuters. These flows have gone up to some 4 billion cu ft since the start of August, versus 3.3 billion cu ft daily in July. Cancellations are also declining. Canceled U.S. cargos for October are the lowest since May, thanks to a price rally sparked by a partial outage at the Gorgon LNG in Australia.
Yet this is a small consolation. The United States is not the only place where energy companies are building more LNG capacity—far from it. The future of the LNG export industry will only be more competitive than its present. Price will become even more important. More production will certainly mean lower prices, but will they be high enough to make the production profitable?