Burgeoning U.S. LNG Export Renaissance Directly Attributable to Fracking
Americans have been enjoying the benefits of the shale gas revolution for years, most notably the unprecedented coupling of economic growth and significant greenhouse gas reductions. Now, the rest of the world is starting to see the benefits of the U.S. natural gas revolution, thanks to another once unimaginable phenomenon that WOULD NOT be happening if not for shale.
The U.S. is exporting liquefied natural gas (LNG) at a record pace and will soon become a net natural gas exporter for the first time since the Eisenhower administration. As recently as 2015, the U.S.’s only LNG exports were by pipeline to Mexico. Flash forward two years, and we are now exporting natural gas to 20 countries and are on pace to become the world’s third largest LNG exporter in the near future. Some even believe the U.S. could become the world’s biggest LNG exporter within a few short years.
The incredible projected upward trajectory of U.S. LNG exports is graphically demonstrated in the following Energy Information Administration (EIA) chart, released in February.
Considering the myriad of benefits this development entails — both globally and domestically — the U.S.’s sudden ascension on the LNG front could well be the most important story in the world nobody is talking about (with apologies to the Wall Street Journal, Reuters and Bloomberg).
Those who have taken notice are not mincing words. Wall Street Journal contributor and former Obama energy advisor Jason Bordoff recently said that because of the U.S. LNG export phenomenon:
“The U.S. will emerge as a global gas superpower, helping reshape global energy trade patterns, enhancing energy security for consumer countries, weakening the power of pipeline politics and a small group of dominant gas suppliers, expanding access to energy, and helping countries struggling with severe air pollution.”
Again, none of this would be possible without fracking, which has led to a 50 percent increase in U.S. natural gas production since 2005 and now accounts for two-thirds of domestic production. The break-neck pace of the current LNG renaissance considered, it is difficult to stay on top of everything that’s taken place in two short years. Here is a closer look at what’s responsible for the LNG export phenomenon and why the best is likely yet to come.
LNG: What It Is, And Why the World Wants It
As the above Steelhead LNG graphic illustrates, liquefied natural gas (LNG) is simply dry natural gas that is converted to liquid form by cooling it to -162 degrees Celcius (-260 degrees Farenheit) through a process known as liquefaction. This extreme cooling reduces natural gas to 1/600th its normal volume, making transportation via ocean liner possible, allowing LNG to reach far-away destinations where pipeline transportation is not an option.
Prior to being exported, the colorless, odorless, non-toxic and virtually non-flammable liquid natural gas is stored in tanks at near-atmospheric pressure. A more detailed explanation of the process can be found here.
LNG has been around a long time. But its trade was limited in past decades by high costs and stringent long-term contracts tied to the price of oil. But now, thanks to advances in LNG technology, the way natural gas is traded has been revolutionized. As Bordoff recently noted, natural gas’ historic disadvantage compared to other fossil fuels is no longer an issue,
“Unlike oil or coal, which can be moved easily between any two ports, natural gas has been far less flexible, requiring pipelines between two fixed points, creating unique energy security risks for gas-consuming countries dependent on gas suppliers. But once liquefied through super-cooling, natural gas can be moved by special tanker and becomes more flexible, leading to today’s growing trade by ship.”
Until recently, supply was another issue inhibiting LNG trade. In fact, in the mid-2000s, some “peak gas” alarmists predicted the U.S. had “about 10 years” of natural gas left at its disposal. But that’s certainly not the case any longer, and the U.S. shale gas revolution’s role in changing that reality cannot be overstated.
The Wall Street Journal recently reported that global LNG exports will likely surpass 294 million metric tons this year, up 22 percent from three years ago, and will likely rise another 21 percent by 2020, according to IHS data and forecasts. These trends are been driven by the U.S.’s sudden emergence as an LNG player.
U.S. LNG exports were valued at better than $270 million this past April, a 575 percent increase from values from April 2016. Reuters recently reported that by the end of 2018, U.S. LNG export capacity in the lower 48 states will top 6 billion cubic feet per day (bcfd) — all because of the abundant supply made possible by fracking. EIA projects that number will balloon to 9.2 billion cubic feet per day by 2020.
Of course, all of this makes peak gas theorist Richard Heinberg’s 2015 prediction that there “won’t be enough natural gas to enable U.S. exports of any significant magnitude” look quite foolish.
As Bordoff recently noted, U.S. shale gas has completely transformed global LNG trade (for the better) to a degree few imagined,
“Most analysts projected global gas trade would be dominated by Iran, Qatar and Russia. These countries not only held the largest reserves but were also intent on using their growing market power for geopolitical leverage, and considered forming a ‘gas OPEC.’
“The U.S. shale revolution turned that outlook on its head, as domestic gas production shot up 50% from 2005 to 2015. The U.S. is now projected to be one of the top three natural-gas exporters in the world by 2020.”
Reasons the U.S. LNG Phenomenon is Happening: Abundant Supply, Infrastructure and Price Stability
Not only is there currently an abundance of natural gas, there is also no reason to believe the supply will wane, which has bolstered investment in crucial infrastructure (more on that in a bit). Recent discoveries such as the USGS’s estimate of 304 trillion feet of recoverable gas in the Bossier and Haynesville formations along the Gulf Coast give every indication that the U.S. is in position to shatter production records achieved in 2015. As the Wall Street Journal recently noted,
“At the heart of the changes is supply. Huge new discoveries in the U.S., Middle East, East Africa and Australia, along with recovery techniques such as fracking, have expanded the amount of gas available for export. Companies and countries are moving to develop new markets to where they can sell it all.”
The fact that we currently have more natural gas than we know what to do with might be a huge problem if not for essential infrastructure being developed deliver this gas to the rest of the world. And this exciting development is only in its infancy.
LNG exporting pioneer Cheniere opened the first-ever continental U.S. LNG export facility early last year. And though that facility is currently the only exporter of LNG in the lower 48 states, an additional 24 LNG export facilities are currently planned or under construction across the country. Four terminals currently under construction are expected to open by 2020.
Seven of the new facilities will be based in Texas (Texas LNG project, Golden Pass LNG, Rio Grande LNG, Freeport LNG, Port Arthur LNG, Annova LNG and Cheniere’s Corpus Christi LNG project), and Louisiana is another hot spot.
Venture Global LNG has raised $361 million for two proposed LNG export projects in south Louisiana, Tellurian Inc. is also seeking to export gas from the U.S. Gulf Coast, and Delfin LNG LLC is building a floating liquefied natural gas terminal off the Louisiana coast that will export 1.8 billion cubic feet per day of natural gas when completed in 2020.
This activity has single handedly led to the resurgence of the Hayneville Shale in Louisiana and Arkansas due to its close proximity to these LNG hubs. Haynesville production is projected to increase in June for the seventh straight month and reach its highest level since October 2014. Thanks to its ideal location, this formation is poised regain at least some of the stature it enjoyed in 2011, when it surpassed the Barnett as the highest-producing shale gas play in the U.S. Bolstered by the fact that break-even prices are about half of what they were in 2015, many small operators in the Haynesville are now going public due to the expected flurry of activity in Louisiana and Texas in the coming years. As Chesapeake CEO Doug Lawler recently said,
“[The Haynesville] was largely written off by industry two to three years ago, but it has reemerged stronger than ever.”
In the northeast, Dominion Energy Inc. is slated to complete an export terminal at Cove Point in Maryland online by the end of the year.
The Federal Energy Regulatory Commission (FERC) has approved 11 export terminals that are either planned or under construction, and E&E News reported this week that the Deparment of Energy may start fast-tracking the FERC permitting process, which has been bottlenecked by a lack of a quorum and typically takes up to a year.
This all started with the opening of Cheniere’s export facility in early 2016. As the following Bloomberg chart shows, that pioneering Sabine Pass facility has been such a success since opening in 2016 that the company is now even exporting LNG from Canada.
Perhaps most importantly in the grand scheme, the U.S. shale-led spike in LNG exports has started to establish a global price benchmark based on demand rather than the antiquated and wildly varied region-to-region price environment that preceded it, which was due to stringent pipeline contracts that hampered trade. In the new LNG global market, tankers are now free to re-route and ship to the highest bidder on a whim.
Thanks to this supply-and-demand based benchmark, based on the U.S. Henry Hub, the Wall Street Journal notes, “…The U.S. appears to be exporting its low gas prices rather than importing higher ones from the rest of the world.”
Indeed, the LNG surge has not sent U.S. prices soaring, as some feared. Though prices have been on the uptick due to global demand for U.S. gas, the shale industry’s ability to meet that demand have kept energy prices from soaring, as the EIA recently noted,
“New natural gas export capabilities and growing domestic natural gas consumption contribute to the forecast Henry Hub natural gas spot price rising from an average of $3.16/MMBtu in 2017 to $3.41/MMBtu in 2018.”
Forbes contributor James Taylor has also noted,
“American natural gas is so abundant and inexpensive that natural gas exports will do little to constrict supply here in the United States. Foreign money will pour into the United States as other nations purchase American natural gas, and Americans will still pay low prices here at home.”
Why LNG Exports Are A Good Thing for the U.S. and the World
U.S. LNG exports are truly a win-win globally and domestically, as the U.S. will continue to see an economic windfall, while the rest of the world will be able to reduce greenhouse gas emissions, air pollution and reliance on natural gas from hostile nations.
A recent Texans for Natural Gas report found LNG exports could create 136,000 jobs nationwide and a total economic impact of over $145 billion across the country. A recent American Petroleum Institute report is even more optimistic, finding,
“LNG exports could contribute up to 452,000 jobs nationwide between 2016 and 2035 and up to $73.6 billion annually to the GDP. (p. 38)”
A prime example of the positive geopolitical impact of U.S. LNG can be seen in Eastern Europe, where notable new U.S. LNG customers like Poland and Lithuania will no longer be under Russia’s thumb, as Bordoff noted,
“Just before Lithuania started operating its LNG import terminal, aptly named ‘Independence,’ it negotiated a more than 20% discount off its gas bill from Gazprom. Poland’s new LNG terminal will allow it to achieve its strategic objective to replace Russian gas imports with alternatives. And growing competition from LNG helped encourage Gazprom to settle the EU Commission’s long-running antitrust case against the company.”
Poland Prime Minister Beata Szydlo referred to the first-ever shipment of U.S. LNG last week as a historic moment that improves the region’s energy security,
“Today Poland can say that it is a safe and sovereign country, also because we have such wonderful investments” like the LNG terminal. “Days like this go down in history.”
Given this threat to its global market share, it’s no wonder there is evidence that Russia has bankrolled anti-fracking propaganda.
Increased natural gas use worldwide could also help nations achieve the U.S.’s remarkable greenhouse gas reductions. The U.S. has seen carbon emissions drop 11.7 percent since 2005, two-thirds of which the EIA has acknowledged are attributable to increased natural gas use. A 2015 Carnegie Mellon University study also found that U.S. LNG exports could lower global methane emissions, considering Russia’s methane leakage rate is between five and seven percent and the U.S. leakage rate is just 1.2 percent, according to the most recent EPA data.
The prospect of lowering greenhouse gas emissions is just one reason the International Energy Agency recently forecasted a “second natural gas revolution” spearheaded by LNG trade,
“A more flexible global gas market, linked by a doubling of trade in LNG, supports an expanded role for natural gas in the global mix. … The development of a more globalised market and its status as the least-polluting of the fossil fuels helps gas gain ground, overtaking coal in the global mix. Changes in market operation, business models and pricing arrangements are catalysed by a new diversity among suppliers, with North America, Australia, East Africa all emerging as major exporting regions.”
A recent Forbes headline stated that “Natural Gas Is The Future of Energy, and It’s Not Even Close.” The fact that the U.S. recently signed a deal to export LNG to China, the world’s third-largest importer, is just the latest evidence. And there’s little doubt that the U.S. shale revolution is the reason such remarkable headlines are being written.