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Optimism Reigns For U.S. LNG As Global Supply Fear Wanes

Against the public outcry over use of fossil fuels, and proposed climate change policies, including state-level interference aimed to reduce fossil fuel projects, the global natural gas sector is thriving, specifically liquefied natural gas.

In a world thirsty for clean affordable energy sources, global demand for LNG is expected to double by 2035, and global investment in pending export projects is about $366 billion.

More than half of those export projects are U.S. LNG facilities, according to Bloomberg New Energy Finance. There are 27 global export projects pending, 15 are for U.S. facilities awaiting final investment decisions or approval from the Federal Energy Regulatory Commission.

As global populations and emerging economies grow, the U.S. LNG industry has positioned itself as a major world supplier. Just over three years ago, the U.S. was not exporting LNG by any real measure.

Now, by most accounts, the U.S. is expected to become the third largest supplier in the world behind Australia and Qatar, as early as year’s end, when the U.S. export capacity is expected to reach 8.9 billion cubic feet of LNG/day.

Nowhere is this optimism stronger than in Cameron Parish, Louisiana, home to five major U.S. LNG projects, including Cheniere’s $18 billion Sabine Pass export facility, the first to export from the Lower 48 states.

Cameron Parish Port Director Clair Hebert Marceaux and Louisiana Economic Development Deputy Brad Lampert told the 3rd Annual LNG Summit in Houston last month they’re seeing economic growth on steroids in the parish and across the state thanks to LNG.

Louisiana has attracted more than $60 billion in total foreign investment over the past decade. The state’s per-project foreign direct investment has averaged $300 million, more than twice the average project investment seen in any other U.S. state, according to fDi Intelligence, a division of The Financial Times.

Marceaux and Lampert said Cameron Parish in 2013-14 had the fastest growing GDP of any county in the country, increasing 67% that year alone.

Cautiously Pessimistic

Despite U.S. optimism, the International Energy Agency is not bullish on LNG.

In its 2018 World Energy Investment report, IEA said global investment in liquefaction facilities, which cool gas into liquid at minus 260 degrees Fahrenheit so companies can transport it by ship, peaked in 2014 and 2015 at around $35 billion a year. Global investment is expected to decline to below $15 billion a year in the absence of new projects, IEA said.

Also, global LNG exports grew only by 1% in 2018.

But U.S. LNG exports grew by more than 50% percent in 2018, according to the American Petroleum Institute and a 2019 report by Bloomberg and Poten & Partners.

The U.S. exported more than 3 billion cubic feet per day (bcf/d) of LNG and now represents more than 7% of the global market, currently dominated by Australia and Qatar, respectively.

In 2017, IHS Markit, which is hosting the celebrated CERAWeek conference in Houston this week, agreed with IEA and was not bullish on LNG. But it is now.

Gautam Sudhakar, director of global LNG for IHS Markit, said, “We do expect a lot more LNG capacity to materialize this year and next. From 2015 to the end of 2018 there was very little investment activity in new supply, and now producers and buyers alike are concerned that there could be a shortage of LNG in the next decade.”

Because of this, North America began to see increased momentum on project approval in the fourth quarter last year, he said.

Two large-scale projects reached financial investment decisions—Shell’s LNG Canada and Exxon Mobil Corp.’s Golden Pass terminal in Sabine Pass, Texas.

Sudhakar said the new wave of supply growth is different in that project sponsors are incurring much of the market risk.

“They are underpinning the offtake contracts in order to reach final investment decisions with the strategy of marketing those LNG volumes to end-consumers later in the project life-cycle,” Sudhakar said. “This is in contrast to the conventional model where LNG offtake is sold directly to end-users of LNG prior to final investment decision.”

Sudhakar said, “There is risk of oversupply conditions in the near term with the supply growth largely from the U.S. and Australia in recent years coming on to the market.”

But, “a key indicator is looking at European import levels since it acts as a market of last resort for LNG. And in recent months import levels have been very strong into Europe and global spot prices have softened,” he said.

“Whenever you have a strong supply surge, there will be risk of a glut if demand can’t keep up. We are seeing an unprecedented level of investment in new capacity so the mid-2020s might also see surplus conditions,” Sudhakar said.

China Or Not, The Year of U.S. LNG

U.S. optimism is dwarfing global demand and hurdles to LNG expansion including: increasing state-level interference with fossil fuel infrastructure projects, existing pipeline constraints overseas and in the U.S., price uncertainty for oil price-linked contracts in particular, concerns about oversupply, and the year-long U.S.-China trade war marked by a 10% Chinese import tariff on U.S. LNG and a 25% U.S duty on imports of steel and aluminum.

The American Petroleum Institute said the trade war has taken a toll. U.S. LNG cargoes to China dropped about 20% from 2017. API said U.S. LNG expansion is reliant on China as a buyer.

In a January blog, The Collision Between U.S.-China Trade Policy and LNG Exports, API said, “If global trade fissures continue to deepen, future U.S. LNG projects and the billions in investment and thousands of jobs associated with those projects are likely to be hampered – that is, without support from the world’s largest growth market in China.”

China is expected to become the largest natural gas importer in the world.

When the steel and aluminum tariffs were imposed last year, “there were supply problems, shortages, delays especially in the summer and fall of last year, but those barriers have been overcome,” John Murphy, senior vice president for International Policy at the U.S. Chamber of Commerce, said.

Christopher Guith, senior vice president for the U.S. Chamber’s Global Energy Institute, said, “While oil and gas companies protested [against the tariffs], none were deterred from paying additional cost to build their facilities.”

Guith, who represents U.S. energy companies, said the tariffs in some cases would tack on $200 million to $400 million to the cost of a facility.

“Market incentives to produce energy, build infrastructure and move those hydrocarbons are so valuable,” the tariffs have not severely constrained the industry or thwarted LNG expansion, Guith said.

After a nearly seven-month investigation into China’s potentially unfair trade practices in 2017, President Trump announced in March 2018 how he would address the issue using three tactics—tariffs, a World Trade Organization dispute settlement process, and investment restrictions. The most controversial of the three has been the tariffs.

Since last March, the Trump administration has imposed tariffs on $250 billion worth of Chinese imports into the U.S. across various industries.

China has retaliated with tariffs on $110 billion in U.S. goods going into its market.

The Commerce Department, which handles steel and aluminum waiver applications, reported as of Feb. 27 that it had received 45,158 applications for relief from the steel tariffs.

Commerce has made determinations on 23,806 applications. It has approved most of those—16,679. It has denied 7,115 requests.

Commerce has received 6,035 applications for aluminum tariff waivers. It has made determinations on 3,595 of them, approving 3,009 and denying 586.

The Government Is Here To Help

Streamlining the application and approval process for LNG export facilities has helped the U.S. industry.

Each U.S. LNG export project must apply to the Energy Department and FERC concurrently for approval.

The Natural Gas Act authorizes DOE’s Office of Fossil Energy to determine whether a U.S. company’s plan to export natural gas to a nation with which the U.S. does not have an existing free-trade agreement is in the public interest.

There are 19 pending export applications at the Energy Department as of March 6.

Meanwhile, FERC oversees siting and construction of LNG facilities. It issues environmental impact statements and makes a determination about a project’s emissions and subsequent environmental impact.

FERC currently oversees three operational LNG export terminals—Dominion Cove Point LNG in Maryland, Cheniere/Sabine Pass LNG in Louisiana, and the dormant Marathon Petroleum LNG plant in Kenai, Alaska. Cheniere’s Corpus Christi, Texas, export terminal is under construction.

But in late February, FERC, led by Chairman Neil Chatterjee, adeptly approved the first LNG terminal in two years—Venture Global’s Calcasieu Pass LNG export project in Cameron Parish, Louisiana—and addressed the critical question of how to determine the impact of a facility on greenhouse gas emissions linked to climate change.

Analysts across the industry predict this move by FERC will clear the way for applications clogged in queue.

FERC issued a final environmental impact statement to Tellurian Inc.’s Driftwood LNG facility and associated pipeline earlier this year. Tellurian said it could break ground as early as this summer.

“It takes a long time to get a project across the finish line and built, almost a decade, but the permitting process has gotten more efficient,” Charlie Riedl, executive director of the Center for LNG in Washington, said.

That efficiency, he said, adds a level of predictability that is “attractive to international buyers.”

There are 13 projects awaiting a draft environmental impact statement from FERC. Riedl said all are expected to receive a draft EIS by the end of 2019.
Source: Forbes

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