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LNG Exports – Demand Savior in a Producer’s World

April 15, 2015 | By Jack Weixel

LNG - Port of RotterdamThe United States is unequivocally long hydrocarbons due to the growth of both domestic natural gas and crude oil production. One of these commodities has found a possible solution to its oversupply problem, while the other is constrained by a 40-year-old legislative and policy decision that may or may not be relevant in the world we live in today. In this week’s edition of Get the Point, PointLogic Energy will address the workable solution of liquefied natural gas (LNG) exports, leaving crude oil export policy for another day.

As early as the fourth quarter of this year, LNG exports will make an impact on the supply and demand equation for natural gas and on the future price environment for both consumers and producers. Plenty of time has already been spent detailing project feasibility and probability, this short analysis will focus on anticipated incremental demand through 2019 as LNG exports become a force to be reckoned with on the demand side of the equation.    

As of the end of March, the Federal Energy Regulatory Commission (FERC) is monitoring five projects that are under construction. These are Sabine Pass and Cameron LNG in Louisiana, Freeport LNG and Corpus Christi LNG in Texas, and Cove Point LNG in Cove Point, Maryland. In addition, Kinder Morgan has announced that it is readying its EEC Pipeline in Georgia to support liquefaction operations at its Elba Island terminal. Lake Charles LNG in Louisiana, an early first mover in permits and applications with the FERC and Department of Energy (DOE), has fallen off pace with a final investment decision (FID) by its owner BG being pushed to 2016. While various reports had speculated that the decision to delay FID was due to the depressed price of global crude oil, a more prescient explanation may be that the proposed terminal could be a casualty of BG’s upcoming acquisition by Shell. 

In the next three years, at least three of these projects will be up and running, with Cheniere’s Corpus Christi facility and Freeport facilities available in December 2018. The graph below depicts announced export capacity in billion cubic feet per day for each facility.

LNG Export Capacity   

As the market understands very well, capacity numbers do not translate directly into nominated volumes and oftentimes in-service dates can be slippery. With that said, we can make some reasonable assumptions about actual LNG export demand from the above figures. With a little over 1.0 Bcf/d of capacity online as of December 2016, a conservative estimate is that on a daily basis in 2017, at least half this amount could be liquefied and loaded on ships. To put this in perspective, anywhere between 0.4 Bcf/d and 0.6 Bcf/d would not be available to put in storage during 2017, leading to a systemic demand shift of 182.5 Bcf through June. In mid-2017, the market is looking at an additional 1.0 Bcf/d of capacity coming along for half the year, which using our same assumption, would lead to a total of 365.0 Bcf unavailable to storage for the second half of the year. Small peanuts, some would say, and certainly a deficit that can easily be overcome by production gains over the same period.

In 2018, with Cameron LNG fully operational, another 1.7 Bcf/d of capacity comes online, which would mean an additional 0.9 Bcf/d or 328.5 Bcf of annualized demand on top of 2017’s 365.0 Bcf. On a daily basis, in 2018, the market can expect to be missing 1.9 Bcf/d of gas that will be sent to overseas markets. That number can be expected to double to nearly 4.0 Bcf/d in 2019 with the addition of Freeport and Corpus Christi terminals.

LNG Export Capacity and Flows

The Energy Information Administration’s (EIA) latest release of the Short Term Energy Outlook pegs total domestic demand growth in 2015 at 2.8 Bcf/d over 2014 levels. Demand in 2016 will only be 2.0 Bcf/d above 2014 levels; however both these numbers assume annual decreases in residential and commercial demand, which is highly dependent on weather and wildly variable by season. Demand from the power sector is expected to be 2.0 Bcf/d higher in 2016 versus 2014 levels with industrial demand chipping in another 1.5 Bcf/d.

2016 Incremental DemandAdding in the rough estimate of Sabine’s first terminal expansion export figure, total incremental demand from power, industrial and LNG export in 2016 versus 2014 would be approximately 3.75 Bcf/d.  From our rough LNG export estimates, the market can expect up to an incremental 1.7 Bcf/d between 2016 and 2018.

EIA’s report also predicts that marketed production will increase by 3.8 Bcf/d and 1.5 Bcf/d in 2015 and 2016, respectively. Discounting that number for liquids content and Alaskan production yields lower 48 production gains of 3.7 Bcf/d in 2015 and 1.4 Bcf/d in 2016. Most of this growth is expected to come from the Northeast and aided by new pipeline projects that will get natural gas out of the region to points west and south (as detailed in the last two issues of Get the Point).

In total, the lower 48 can expect 5.1 Bcf/d of incremental production in 2016, easily matching the anticipated increase in demand plotted in the graph above. In fact, the lower 48 can expect to be nearly 1.4 Bcf/d long in 2016, or nearly 493 Bcf annualized, which should be enough of a surplus to handle any major weather disturbances that could appear in early or late 2016.

Looking out forward to 2017, 2018 and 2019, LNG export demand by itself will put ample pressure on producers to continue drilling, but by this time, demand could very likely find itself transitioning into the driver’s seat, reversing a 7 year long run of a producer dominated natural gas market. 

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