https://www.methanist.com/wp-content/uploads/2019/08/Methanist-posts-should-the-us-export-lng.jpg 321 835 Rudolf Huber https://www.methanist.com/wp-content/uploads/2019/04/logo-big-2019.jpg Rudolf Huber2019-08-13 15:23:522019-08-13 15:23:52Is it smart for the US to export LNG
Oscar Wilde once famously said that there are two tragedies in life: one is not getting what one wants, and the other is getting it.
It is easy to feel concerned for developers of new, unsanctioned US-based LNG terminal projects today. The US Gulf Coast and the gas business therein have a tormented history. Most of what we see today as liquefaction terminals are what was salvaged from regasification terminals that became redundant with the advent of shale.
Those terminals are a fitting example of the adage “When you have lemons, make lemonade” and they are also a potent symbol how the US eclipses all other countries in its ability to raise new ventures out of the ashes of their prior failings.
But the planned new projects are very different beasts. They don’t carry the baggage of the prior failure with them. They were to be purebred export ventures designed and built to bring US LNG to the world. No deadwood, no legacies, no hangover. Just efficiency and export power.
But those new projects come with a serious impediment.
They need to bridge some very conventional requirements with the new, madhouse developments in the LNG world.
Understand: contrary to many reports, LNG is still a very old fashioned world where a large project needs some form of financial guarantees in order to be sanctioned by the financiers. An oil project would try to determine what the market for oil is going to be in the future and consequently be able to develop a business plan that takes those assumptions into account when it searches for finance. And financiers are largely happy with this state of affairs.
Not so in LNG.
LNG actually needs off-taker agreements for a certain duration (usually way in excess of 10 years) and on a pre-determinable price that would be assumed to be high enough to earn the project enough money to reimburse the lenders for their efforts.
This essentially means two things. You need a creditworthy counterpart that signs up to a contract that will start delivering LNG in no earlier than 5 years, will deliver to you LNG for way longer than 10 years while you cannot refuse to take it, and does so at a price that’s sufficient to cover the cost of CAPEX, OPEX and a decent Rate of Return.
In an oversupplied world, where Asia usually sucks off most of the available LNG but where prices are still very low, its hard to find an arrangement that would give a project a sufficient financial basis.
Not an easy situation.
The big shining light in every LNG project developers eyes is China. Its the strongest growing of the big LNG markets and is expected to expand gas use by leaps and bounds mainly in order to improve its appalling air. Its the big price that everyone covets and pins his hopes to.
In comes the Trump administration and brings a trade standoff hat brewed for years in the background into its hot phase. Instantly, years of efforts by project developer evaporate. No offtake contracts with China, no access to the Chinese market and consequently no project FID.
US LNG project developers suffer the first part of Oscar Wildes dictum. Suddenly, they did not get what they had wanted.
That being said, just imagine they would have gotten what they wanted. Let’s assume that those projects would already have contracted with China, the project got underway and now China suddenly rescinds the contract because of the trade war while they are under construction. That’s throwing a nuke into a pretty complicated situation.
But instead, the new projects either simply give up, or they wait it out hoping for the best in the trade war or they learn to reorient themselves altogether.
And there is a rather sizeable consolation prize on the horizon. The US internal market and the near abroad.
As a first, the US would be able to use LNG that it aims to export now in its own home markets and replace diesel, which is in part still refined from imported crude oil.
According to the EIA, in May 2019, the US imported about 9,8 MMbbl/day of oil and exported around 8,2 MMbbl/day. This makes the US a net oil importer to the tune of 1,6 MMbbl/day of oil. This also corresponds roughly to the total oil consumption of the United Kingdom.
This imported crude oil represents a net financial loss of value for Americans as it needs to be bought with hard cash from outside the US. When at the same time LNG gets exported at lower prices than the import of crude costs, this is a net loss to the US economy and hence every single American.
Oil products also fetch a much higher price on the world market than LNG does. For illustration, the most important price marker for LNG in Asia is the Japanese import price which currently stands at 4,7 USD/MMBtu. At the same time, diesel fetches approximately a hefty 14,5 USD/MMBtu.
The reason is simple. Diesel use is much more ubiquitous plus diesel is a liquid at ambient conditions and hence easier to use. It’s also much dirtier as a fuel than LNG is.
Bringing LNG to Asia is expensive. All those new projects are close to where the gas is – on the US Gulf Coast. This means they are on the wrong side of the ocean. They need to cross the Panama Canal at great cost. Then the great transverse of the Silent Ocean starts. To give you an idea – Houston Shanghai passing through the Panama Canal takes more than one month voyaging one way. That’s a long expensive trip and the cost of it comes down from the purchase price. Not much left on the table.
But North America has already laid down the seedlings for LNG fueling. What it needs to do now is expand on it massively. What this does is lowering the price for the fuel that Americans use every day, make America’s air much cleaner and also incite the development of a technological and logistical base that is unparalleled in the world. Technology and know-how that can one day be exported at great profit.
In the meantime, it would reduce imports and one day perhaps even make the US a net oil exporter.
However, let’s not forget about LNG exports altogether quite yet. Right on the doorstep of the US is a series of large and small countries that would all appreciate flipping at least part of their portfolio over to LNG. This includes the entire Caribbean, Mexico, and Central America but even the northern coast of South America.
The June price for Natural Gas in Gas Region 4 of Mexico was 4 USD/MMbtu and Gas Region 5 closer to the Gulf was 3,5 USD/MMBtu. That’s just a dollar shy of Asian level without this monster transport leg that will cost as much as this already. There is very little Natural Gas in the far south of Mexico which means that prices there will compete with diesel which is way more expensive than LNG again.
Developing the near abroad and the home market makes a lot of financial sense for any US LNG project. This, of course, means a lot of legwork and the development of an undeveloped market is never easy and carries risks. But if your alternative is no project at all because of trade conflicts with China, you might well kiss the frog. I think it would transform into a handsome prince in time.
A new American age is nigh. How that – read the last episode of this 3 part series next week.