The rise of U.S. LNG exports: Strategy and global implications

On November 13, the Monday Club organized another interesting event, once again focused the energy sector, and this time the topic was liquefied natural gas.

The panelists were Reza Haidari, Head of Natural Gas Research at Refinitiv (formerly Thomson Reuters) in New York, and Nikos Tsafos, Senior Fellow at the CSIS; Center for Strategic & International Studies, Energy and National Security Program, in Washington DC.

23% from our energy comes from natural gas, so the topic is highly relevant and the U.S. is slowly becoming an important exporter of gas. Globally, 70% of gas is consumed in the country where it is produced, primarily due to logistical matters. Around 30% of the annually produced gas is exported, 2/3 is via pipeline and 1/3 is liquefied and transported accordingly. The process of liquefying gas is relatively straightforward and the gas has an approximate 600 times shrinkage, enabling the liquefied gas to be transported via specially built vessels and ships. At the same time, to retrieve gas is very capital intensive. A recent gas production facility is Alaska costs $45 billion and has a time horizon of payback of around 20-25 years.

In terms of global U.S. exports, Asia is the largest importers of LNG as Europe is mostly still dependent on pipeline import. The U.S. is relatively new in the energy export business with focus on oil, but has also started to export gas.

Regarding the price point, Reza mentions that it is still in transition with widely different price levels globally. In the U.S. the price is in the range of $3-$5, whereas the price point in Europe is around $10 and in Asia closer to $18. The time perspective and break-even for investments are very long, often 20-25 years minimum.
The commercial model is spending a lot of capital upfront, operating expenses are very low, approximately 2% of the investment. The U.S. export model is driven by lower price levels in the U.S. and a price gap to exporting, making it possible for U.S. to make a profit despite logistical expenses. In the U.S. there is an oversupply, but it is still difficult to see what future price levels will be, according to Reza.

There are about 200 LNG ships globally that are chartered with long-term contracts. Mexico is the largest importer of U.S. gas followed by Korea. N order to export, the process requires terminals on the other side, the importing side, where the liquefied gas will have to be re-gasified. In the process, about 6% of the gas is lost, making the export breakeven point about $10-$11.

Nikos points out that it is therefore very difficult to make it worth exporting to the Europe as the price there is $10. So why would the U.S. want to increase export to Europe then given that they more or less just break even?

According to Nikos, U.S. gas export has be viewed in a more holistic way. The U.S. agenda is broader with aspects such as bringing down U.S. trade deficit; negotiate trade agreement in which energy is becoming more important. There is also an obsession with showing that Europe is beholden to Russian gas for a long time. Trump’s idea is therefore that delivering gas to Europe, even at a loss, will have positive political impact for the U.S. in limited European dependence on Russian gas.

In reality though, according to Nikos, U.S. export to Europe is minimal and often more of a U.S. media obsession. Most of Russian gas is still traded on market price, so called fair level. “Who is afraid of Russian gas?” written by Nikos is recommended further reading.

Furthermore, most gas is imported by European nations via pipeline as this infrastructure is already built up and functions well. The Trump factor is also related to trade wars both with Europe and China and Trump is trying to reduce the trade deficit using energy as one key component in negotiations.

From a long term perspective of 20-25 years, there are still many unknowns given the global price fluctuation. Obama started the U.S. export strategy and Trump has continued and escalated to language both of oil and gas export and trying to include energy in trade negotiations, but it has not really materialized yet, according to Nikos. Several countries has signed up to buy, but not yet committed to actual buying gas from the U.S.

Gas prices are still quite volatile, so there is a potential risk that exports become unprofitable in the future. Trump seems to focus on pursuing increased oil and gas exports regardless of supply and demand and pricing. Price level in Asia is linked to oil, which is not the case in the U.S. or Europe as gas is oil substitution in Asia.

Nikos does not think energy needs Trump help and that Trump’s recent linkage with NATO and energy export does not make sense from a consumer perspective. This is rather a political message, trying to negatively influence allies and put additional political and economic pressure on Russia. Bottom line is that Germany never has had a problem with gas import from Russia. With other countries such as Ukraine, formally part of the Soviet Union, the gas has gone from heavily subsidized gas to market prices. This has increased the price level in Ukraine, but should certainly not be considered extortion, but rather the effect of a divorce and shift to fair market prices.

According to Nikos, Trump will most likely continue to play his aggressive political cards, in particular in Europe. From an economical perspective though, U.S. LNG export to Europe makes little of no sense, and the U.S. would benefit from building up stronger export capabilities to Asia, given the price level and the existing trade deficit with China.

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