Global Funding Problem Creates a Rare Opportunity for LNG Investors

Matthew Carr By Matthew Carr, Emerging Trends Strategist, The Oxford Club

Oil & Gas

Just a couple of weeks ago, Malaysia’s state-owned company Petronas abandoned its plans for the Pacific NorthWest liquefied natural gas (LNG) terminal on the British Columbia coast in Canada.

About $10 billion had been spent trying to get the terminal online. But the company simply couldn’t make headway to get it up and running.

It’s part of a trend that’s getting harder and harder to ignore…

Of the more than 20 proposed LNG export terminals in British Columbia, only two are progressing in development.

But it’s not just Canada facing this problem. Across the world, the same thing is happening…

Last year, Woodside Petroleum (OTC: WOPEY) scrapped a $40 billion plan to build a floating LNG terminal off Australia’s western coast.

Investment research firm Sanford C. Bernstein & Co. projects that of all the LNG export terminals proposed to come online by the mid-2020s, more than two-thirds won’t ever be built.

So what’s behind this trend?

Turns out there’s a country that’s disrupting global energy and the LNG market in staggering ways… Which country is that, you ask?

The United States of America.

An LNG Market in Turmoil as a New Stalwart Emerges

As of January 2016, the U.S. wasn’t really considered an LNG exporter. Besides a small amount that was shipped from Alaska to Japan and Mexico, LNG export activity was limited…

But by the end of the year, the U.S. emerged as an LNG exporter that couldn’t be ignored.

The U.S. now exports more than 2 billion cubic feet per day (Bcf/d) of LNG from Cheniere Energy’s (NYSE: LNG) Sabine Pass in Louisiana.

Cheniere is exporting to 20 different countries and has shipped more than 100 LNG cargoes since beginning operations last year. The company is now profitable for the first time ever.

By 2020, another five U.S. export terminals will come online, including Dominion Energy’s (NYSE: D) Cove Point in Maryland – the first export terminal on the East Coast.

By then, the U.S. will be exporting 10 to 12 Bcf/d – or about 15% to 17% of the country’s current gas demand.

Meanwhile, the LNG market is in turmoil. Since the start of the year, prices have fallen an average of 36.9% globally. They’re down more than 67% since February 2014.

Supply is outpacing demand… for now.

So with prices falling, the most expensive projects are simply unable to compete with the world’s largest energy market disruptor: the U.S.

And it’s just getting started: By 2019, the U.S. will be the world’s third-largest LNG exporter behind Qatar and Australia.

A Plot Twist in the Global LNG Story

Right now, we’re at an interesting moment in the global LNG story.

Despite the U.S.’s low-cost terminals wreaking havoc on the current price environment – and disrupting terminal projects – growth is booming… and the future is bright.

Last year, global trade hit a record – one that will be broken every year going forward. LNG trade volumes increased 5% over 2015 to 258 million metric tons.

The growth rate was a mere 0.5% in the four years prior.

By 2020, global LNG trade volumes will be 50% more than what they were in 2014.

This uptick is largely driven by demand in Asia, particularly China and India. Just last year, China’s LNG demand increased 35%. By 2030, China is expected to account for 16% of total global LNG demand. That’s a huge jump from its current 4% share.

The number of LNG-importing countries will double to 70 by that time, which means global demand for LNG will increase from 35 Bcf/d in 2016 to 64 Bcf/d.

Rosy Outlook for Cheniere and Dominion

There are currently 114.6 million metric tons per year of LNG projects under construction. This is led by the U.S. and Australia, especially with Cheniere adding a fourth train to the Sabine Pass. But demand will start outpacing supply in the 2020s… especially with all these terminals being shelved.

And that means LNG companies – particularly U.S. ones like Cheniere and Dominion – have an attractive long-term view.

As I wrote last August, the expansion of the Panama Canal is a major boon for Cheniere. The company is now able to reach any major import terminal in the world in 25 days or less.

Dominion’s Cove Point terminal is going to export 800 million cubic feet per day to Europe, taking Russia head on in that market.

We should see prices gaining momentum before long…

That’s because between 2015 and 2030, global natural gas demand is projected to grow 2% per year. But LNG demand is projected to grow twice that rate, at 4% to 5% per year.

With the U.S. emerging in the global energy markets, the pressure is mounting across the world.

Anyone trying to compete with the U.S. has been put on notice.

U.S. companies have been able to lower costs through technological innovations, rendering high-cost projects like those in Canada obsolete before they even start.

The U.S. will be a disruptive force in the LNG market in the years ahead.

Investors (and the rest of the world) should pay close attention.

Good investing,

Matthew