Production and use of natural gas only moves one way on a worldwide basis: up.
Hand-in-hand with upward movement is price volatility – and liquefied natural gas exports. LNG a few years ago was looked upon by industry watchers as the industry’s savior from the natural gas glut then getting underway. That mindset has not gone away.
Look at U.S. production. In 2018, dry natural gas production in the Lower 48 U.S. states repeatedly set new records on a daily, weekly and monthly basis. In every month but December, production levels set a new record, usually by a wide margin, according to OPIS PointLogic. This record-setting performance helped the U.S. build its position as the world’s top natural gas producer.
In the U.S. during the June through November 2018 timeframe, dry gas production averaged 2.60 trillion cubic feet (Tcf) per month, Kallanish Energy calculates from Energy Information Administration data.
From a demand perspective, U.S. dual-fuel power plants last summer did not switch from natural gas to coal despite gas priced higher than previously needed to flip the switch.
The switch did not materialize last year, and gas demand remained strong even at higher price points. EIA data shows the volume of gas used in the power sector between June and November 2018, averaged 1.01 Tcf per month.
“In short, gas-generated power has become more inelastic as it relates to competing fuels, particularly coal,” according to OPIS PointLogic.
Higher and steady prices last summer also affected the pace of working gas being injected into storage. EIA data shows end-of-summer inventory levels were 19.1% below the five-year average. As fall began, those low inventories led to increased volatility.
The latest EIA data shows, as of Feb. 1, total working gas in storage remains 17.5% below the five-year average.
2019: A year of growing LNG production, sales
While steady liquefied natural gas exports from the U.S. only began three years ago this month, rarely does a week go by today that another export project is approved for construction by regulators, another contract for LNG is signed with a middleman or a final user, or yet another facility train comes online, meaning more LNG soon will be loaded and shipped.
Global natural gas markets in 2019 will be shaped by a handful of themes, consulting/analytics company Rystad Energy believes, among them:
* Significant LNG production growth
* The rise of U.S. gas to challenge Russian dominance in Europe
* “Insatiable” demand for LNG in Asia
* A need for final investment decisions on planned liquefaction plants.
“The global market for liquefied natural gas (LNG) is geared for substantial supply growth this year, mirroring a major increase in U.S. liquefaction capacity. Asia’s appetite for LNG – while vast – is not likely to consume all of the additional volumes,” said Rystad Energy’s head of Gas Market Research, Carlos Torres Diaz.
LNG prices will come under pressure due to the healthy supply situation, but the market is expected to tighten again after 2022. That means positive final investment decisions for new liquefaction projects are needed this year so facilities can be constructed to meet future demand.
Ramp up in U.S. & Australian LNG production
Global LNG production is expected to rise 11% and reach 350 million tonnes per annum (Mtpa) in 2019, as new liquefaction capacity is added. Total liquefaction capacity will reach 434 Mtpa in 2019, up almost 10% from 2018.
Most of the new capacity is located in the U.S., where capacity is projected to more than double in 2019, making it the country with the third-largest exporting capacity, pushing Malaysia into fourth place.
“Australia could also overtake Qatar as the world’s largest LNG exporter this year,” according to Torres-Diaz.
The ‘Bear’ vs. the ‘Eagle’ in Europe
LNG exporters are very interested in how much LNG Europe will import, and whether Russia will cut back on gas exports in response, or try to maintain its market share despite the risk of undercutting prices.
Russian gas delivered to Europe has a low breakeven price of roughly $5 per million British thermal units (Mmbtu), Torres-Diaz said. That price compares to a long-run marginal cost of between $6.00 and $7.70/Mmbtu for U.S. LNG.
Torres-Diaz believes that given how fast LNG export capacity will growth this year in the U.S., U.S. sellers may be willing to sell spot volumes at a marginal cost, which would be closer to the $5/Mmbtu price for Russian pipeline gas, if there isn’t sufficient demand in Asia.
Such a scenario could see U.S. volumes compete quite closely with piped imports this year, according to Torres-Diaz.
Growing LNG demand in much of Asia
Total Asian natural gas demand is forecast to increase to 884 billion cubic meters (Bcm) in 2019, driven by higher consumption in China, among other countries.
Already the world’s largest gas importer, China is expected to import roughly 87 Bcm of LNG this year, up 21% from last year, according to Rystad.
Southeast Asian demand tends to be more price-sensitive, and could be helped by low prices, which would help absorb some of the new LNG supply.
As for Japan and South Korea, declining demand due to some nuclear restarts and milder weather may lead to lower LNG imports this year, which would compensate for the overall Asian increase, Torres-Diaz said.
New LNG plants needed to meet demand
The LNG market is poised to tighten again after 2022, and new liquefaction capacity is therefore needed to keep the market balanced.
Projects that reach a positive final investment decision (FID) in 2019 can be operational in 2024 at the earliest, according to Rystad, emphasizing the importance of investment decisions being made this year.
The market could tighten substantially in 2023 as rising Asian demand catches up with supply, posing an upside risk for prices.
“Projects developed by large exploration and production companies will have an advantage since they are not overly dependent on financing and long-term agreements,” according to Torres-Diaz.
Gas available for domestic users, export
With worldwide demand for LNG growing, some industry watchers, particularly large industrial companies that consume huge volumes of natural gas, have for years been concerned if the U.S. can meet internal need.
U.S. dry natural gas production is forecast to grow by 23%, from 75 billion cubic feet per day (Bcf/d) in 2017, to 92 Bcf/d in 2020, according to the most recent EIA Short-Term Energy Outlook (Steo).
EIA further projects the rate of production growth is projected to slow after 2020, but remain positive through 2050, when production reaches 119 Bcf/d.
Consumption doesn’t equal production
Although consumption is also projected to grow through 2050, it does so at a slower rate than dry natural gas production. Consumption in 2050 is expected to be 96 Bcf/d, up from 74 Bcf/d in 2017.
U.S. LNG exports are projected to increase from an average of 2 Bcf/d in 2017, to 14 Bcf/d by 2030. Much of the increase in LNG exports (8 Bcf/d) occurs between 2017 and 2023, as new LNG export facilities come online.
This post appeared first on Kallanish Energy News.