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Can The U.S. LNG Industry Live Up To Expectations?

·4 min read

This year has seen a substantial increase in natural gas exports from the United States, with the bulk of the volumes going to Europe as the continent scrambles to replace Russian gas with alternatives from countries the EU has not sanctioned. Unfortunately for Europe, however, U.S. gas export capacity is not unlimited. In fact, the limits are already showing.

The Energy Information Administration said in its latest Short-Term Energy Outlook that U.S. liquefied natural gas exports during the first half of the year averaged 11.2 billion cubic feet daily, which compared with 9.5 billion cubic feet a year earlier. The agency added, however, that it expected LNG exports to fall during the second half after an outage at the Freeport LNG terminal sharply cut export capacity by close to a fifth.

This outage could not have come at a worse time for the European buyers of U.S. gas, who already have to deal with lower Russian volumes and the knowledge that there is not enough U.S. gas to fully replace the 40 percent of EU gas imports that come from Russia.

It is not just the Freeport outage, either. There are also other constraints for U.S. natural gas exports, and unlike the outage, these are rather more difficult to tackle.

A lot of U.S. gas exports are contracted under long-term deals with buyers outside Europe, the Wall Street Journal noted in a recent report on the industry. According to a Wood Mackenzie analyst that the report cited, some of the Asian long-term buyers of U.S. LNG have been willing to resell cargos to Europe at higher prices, but this is now about to end as everyone in the northern hemisphere begins preparing for winter peak demand.

This challenge can be overcome with more LNG export capacity, and indeed there are many plans for such capacity. The problem is that LNG export terminals cannot be built over a couple of months: the additional export capacity being approved right now will only go into operation in two years or later.

There is also another problem with more LNG export capacity: emission reduction commitments from banks and other financial institutions that would otherwise be the perfect partners of LNG exporters for their new capacity in an environment of steadily and strongly growing demand. The issue with this demand is that nobody knows if it will be there two or three decades from now, from the banks’ perspective.

Related: Will Russia Cut Natural Gas Flows To Europe?

From a realistic perspective, the demand for gas will be there because there is little chance that wind and solar will become baseload-providing sources of energy and that battery storage will become a lot more compact and massively cheaper to replace gas. The question will then be whether there would be enough U.S. gas to satisfy this demand.

Opinions on this differ. According to many if not most industry insiders, the United States has the reserves to supply the world with a lot of gas while keeping the supply of the domestic market stable, too. But some disagree.

“Almost everyone takes it for granted that US gas production will continue to grow strongly as we progress through this decade,” energy investors Leigh Goehring and Adam Rozencwajg wrote in a quarterly market commentary earlier this year.

“With production having nearly doubled in the last 10 years, few analysts bother to even consider underlying shale gas supply issues. But something else has happened that receives no comment – never before has production been concentrated in so few fields.”

The commentary noted that as much as 40 percent of U.S. natural gas production currently comes from just two shale plays—the Marcellus and the Haynesville shale—with another 12 percent coming from the Permian.

This is not the worst part, either. The worst part is that production may be close to peaking in at least one of these plays: Marcellus. Following that peak, it could begin declining in three years, according to Goehring and Rozencwajg.

In addition to such production forecasts, there is also a more widely shared concern about domestic gas prices in a higher export environment. And this, according to the Wall Street Journal, could create political trouble for the LNG industry, possibly of a similar kind as the current problems the oil industry is having with the Biden administration, that is accusing it of being responsible for the oil price rally.

The outlook for LNG demand, meanwhile, remains strongly bullish. S&P Global Commodity Insights has forecast that by 2030, global LNG demand will reach 78 billion cubic feet daily. Demand for U.S. LNG specifically is set to increase twofold by that year, according to S&P Global Commodity Insights.

With the demand there, the only two questions are whether the U.S. will be producing enough natural gas to cover it and whether there would be enough LNG export capacity to ship the gas abroad where it is needed.

By Irina Slav for Oilprice.com

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