How the U.S. Is Taking Over the Global LNG Market

David Fessler By David Fessler
Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

Back in 1969, the Kenai LNG plant located in Nikiski, Alaska, began producing and exporting liquefied natural gas (LNG). It was the second LNG plant ever built and, at the time, the world’s largest.

The plant’s gas came from several offshore production platforms located over the Beluga River gas field in Alaska’s Cook Inlet. Its primary customers were two Japanese utilities, Tokyo Electric and Tokyo Gas.

Kenai is owned and operated by ConocoPhillips (NYSE: COP).

In spite of its prestige and experience, Kenai won’t be able to compete with the upcoming rush of mega-LNG export facilities. Down in the Lower 48, Cheniere Energy (NYSE: LNG) and Dominion Energy (NYSE: D) have plants that are far bigger than Alaska’s Kenai.

Cheniere has been exporting LNG from its Sabine Pass terminal in Louisiana since May 2016. It has four liquefaction trains in operation, with two more under construction.

Dominion recently completed construction on its first train.

The American LNG Revolution

But Cheniere and Dominion are just the tip of the iceberg. It’s a transformational time for the LNG industry.

Just look at what’s happened over the last two years. In 2015, there was a global LNG capacity of 250 million metric tons per year (mmtpa).

Between 2016 and 2020, at least another 140 mmtpa is forecast to come online. But here’s the best part: Nearly 70 mmtpa will be from new U.S. LNG exporters.

Once that happens, the U.S. will no longer be a trivial exporter of LNG via the Kenai plant. It will quickly become the world’s second- or third-largest producer.

Plus, there are roughly 40 LNG import markets, so U.S. suppliers will have plenty of customers.

Currently, the top five LNG importers are Japan, South Korea, China, India and Taiwan. Together, they use about 70% of global LNG.

And South Korean LNG imports could soon see a big rise. President Moon Jae-in opposes both coal and nuclear power and plans to reduce South Korea’s dependence on both.

That represents an opportunity for LNG suppliers…

South Korea may be a good target for Australian suppliers, which are trying to expand business in Asia-Pacific countries, including the five mentioned above.

Meanwhile, U.S. LNG producers are looking to Latin America for opportunities.

That makes sense to me. Local suppliers mean lower transportation costs.

Right now, weather is the primary driver of U.S. LNG prices. But as additional export capacity comes online over the next three years or so, export demand will take over as the primary driver.

Weather will become a secondary factor in the pricing of LNG. Global competition is also a factor.

U.S. producers can deliver LNG for $5 per million British thermal units, which is cheaper than what any LNG-producing country offers.

And it looks like the U.S. will be the source for incremental LNG supply. That’s because there have been no export terminals approved for construction outside the U.S. since 2015.

Because of the growth of the U.S. LNG market, exchanges have started trading LNG futures. It’s a great way for producers and customers to manage price risks and protect profit margins.

When Dominion’s project starts commercial operations soon, it will be the largest regional LNG pricing point. The Houston Ship Channel is another.

For investors, getting on board with some of the early producers is one way to play the growth of the U.S. LNG market. Another is focusing on LNG pipeline master limited partnerships.

The bottom line is this: Make sure you have exposure to the U.S. natural gas market. It’s going to be a huge American export moving forward and a great growth play for smart investors.

Good investing,

Dave

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