Rise of US Oil and Gas Output

In its annual World Energy Outlook report, the IEA said its main projection scenario through to 2040 foresees the US accounting for nearly 75% and 40% of global oil and gas growth, respectively, over the next six years. The agency said that demand growth through 2025 should be driven by China and from the late 2020’s to 2040 by India and the Middle East. The report also highlighted that governments will have a very critical role to play in determining the future of energy systems and policies.

The application of hydraulic fracturing and horizontal drilling has propelled US’s position as a major player in the oil and gas industry. The boom of shale oil and LNG exports has helped US transition from a net importer to a net exporter of energy. Earlier this month the US Energy Department said that US oil production had climbed to a record 11.3 million barrels per day. Roughly half of this can be accounted towards oil produced from shale plays.

Fig 1. US Field Production of Crude Oil

Sources

World Energy Outlook Report, IEA EIA Website

LNG: Heir to Traditional Maritime Fuels

SEA/LNG – a non-profit, multi-sector industry coalition – advocates for the replacement of traditional maritime fuel with LNG. In a recent statement, SEA\LNG explains the environmental importance of investment in the LNG industry. Far more sustainable a power source than traditional mediums like coal and oil, LNG will continue to prompt reductions in greenhouse gas (GHG) emissions as well as improvements in air quality.

Skeptics

While detractors point to LNG’s non-negligible GHG effect, SEA\LNG argues the evaluation of LNG use from an exclusively GHG perspective is “not responsible”.  Alongside GHG appraisals should come air quality assessments when considering LNG as an alternative fuel for marine vessels. On both fronts, the LNG alternative affords great benefits.

Traditional Maritime Fuels & The LNG Alternative

Currently, diesel propulsion engines are the most commonly used engines in the shipping industry. Diesel engines run on “bunker fuels” which emit diesel particulate matter along with other harmful substances. According to the environmental protection agency, “diesel particulate matter is associated with a host of adverse health effects, including cancer.” [2] According to SEA\LNG, the replacement of standard maritime gases with LNG can decrease shipping industry greenhouse gas emissions by as much as 20%, nitrogen oxide (NOx) by 90%, and particulate matter emissions nearly full-stop [1]. As enhancement of the technology continues, emissions are likely to be reduced even further. Concerning the prospect of applying electrical power, the research is skeptical; while hybrid end fully electric batteries can be clean alternatives for short sea operations, they are not so suitable for capacity-demanding deep-sea voyages.

Round-Up

 “It should be noted that the infrastructure for LNG supply is already there; the focus is on investments in the last mile”. As per SEA/LNG’s statement, the onus is on industry leaders to lead in LNG conversion and development. In the meantime, organizations like SEA/LNG and the Society for Gas as Marine Fuel (SGMF) will continue to motivate the transition through empirical analysis and data gathering. The transition from traditional maritime fuel consumption to that of liquid natural gas is not just possible but choice worthy. The opportunity, it seems, is the LNG industry’s to loose.

References:

[1] Chisuse-Van der Boom, K. (2018). CONTINUING INVESTMENT IN LNG AS A MARINE FUEL CRITICAL TO MEETING AIR QUALITY & GHG EMISSIONS TARGETS - SEALNG. [online] SEA\LNG. Available at: https://sea-lng.org/continuing-investment-in-lng-as-a-marine-fuel-critical-to-meeting-air-quality-ghg-emissions-targets/ [Accessed 5 Jul. 2018].

[2] US Environmental Protection Agency (EPA), Washington, DC. "Control of Emissions from New Marine Compression-Ignition Engines at or Above 30 Liters Per Cylinder." Final rule. Federal Register, 68 FR 9751, 2003-02-28. [Accessed 9 Jul. 2018].

Tariffs Meet LNG

Photo Source Linked

On June 1, 2018, the Trump administration imposed far-reaching steel and aluminum tariffs targeting China but extending well beyond. To what degree will the LNG industry shoulder the effects?

The Price of Protectionism

As Tellurian Chairman Charif Souki recently reflected, American steel tariffs “may significantly increase our construction costs.” We at Gas Land have, unfortunately, received indication from several vendors and sub-suppliers describing the extent to which the tariffs have already spiked production and operating costs, especially impacting piping and valve pricing.  

Tit for Tat

Likely to follow American tariffs are China’s own retaliatory measures pertaining to Western imports. One of the world’s largest LNG importers, China is simultaneously the global economy’s principal steel exporter. The country is at once a beneficiary of LNG infrastructure and instrumental to its construction.

As noted in one of our recent blog entries (link blog post), the United States is one of the fastest growing LNG exporters to the Asian world – a trade war would likely reverberate across industries, endangering confidence in economic exchange. What would stop China from taxing American natural gas?

Mounting Pressures

Already struggling to secure adequate investment and sufficiently long-term contracts in a post-boom market, prospective LNG projects are more budget conscious than ever. Any price fluctuation or mere diffidence in the prospect of steady trade rules could prompt recalculation of prior investment deals/requirements. The tedious final investment decision (FID) process for hopeful LNG projects may thus become even less straightforward. More, complications with Federal Energy Regulatory Commission (FERC) approval follow suit. Should steel tariffs continue to diminish the buying power of American builders and manufacturers, the LNG industry will most certainly feel the effects. LNG players should expect nothing less than a cascade of negative externalities.

For LNG, it is too soon to decipher the full impact of steel and aluminum tariffs. Yet for current and pipelined projects, immediate consideration and reassessment of budgets seems immanent.

References:

https://www.chron.com/business/energy/article/Souki-s-Tellurian-warns-U-S-steel-tariffs-could-12758391.php

https://www.reuters.com/article/us-energy-lng-tariffs/u-s-lng-firms-lament-bad-timing-of-steel-tariffs-and-china-trade-spat-idUSKBN1GY2QS

https://www.npr.org/2018/03/08/591744195/trump-expected-to-formally-order-tariffs-on-steel-aluminum-imports

https://www.reuters.com/article/us-usa-economy-poll/economists-united-trump-tariffs-wont-help-the-economy-idUSKCN1GQ02G

LNG's Growing Supply & Robust Demand

Over the past decade, the United States and Australia have seen a jolting “investment boom to build new LNG import facilities”. Though all players trail Qatar in magnitude, the two countries are, respectively, the fastest growing exporters of liquid natural gas in the world (See Figure A):

Figure A

Meanwhile, Asia drives demand in the market as Japan, China, and South Korea have solidified their positions as the top global importers (See Figure B):

Figure B

The LNG wave rolls on, strong as ever, as new plants go online and liquefaction capabilities multiply within and beyond standard markets. Canada is one of the most enthusiastic nontraditional actors interested in breaking the LNG barrier. With a narrow window of opportunity, Canada has been steadfastly supporting the industry’s development. Stipulating four conditions - “a guaranteed fair return for British Columbia’s natural resources; guaranteed jobs for British Columbians; respect and make partners for First Nations; and protect British Canada’s air, land, and water” - the Canadian government confirms its strategic commitment to its burgeoning LNG industry, prioritizing principles of sustainability alongside hard investment. A few lingering Canadian LNG projects include Kitimat LNG, LNG Canada, Cedar LNG Project, Woodfibre LNG, Steelhead LNG, Goldboro LNG, and Bear Head LNG.

The confluence of strong supply-side investment – indicated by several pending final investment decisions - and formitable market demand (especially in emerging economies) seems to signify a promising trend in LNG.

Yet with rising production capacity comes the worry of a supply surplus and, correspondingly, depreciated pricing. As for the LNG long view, only time will tell.

References:

https://energi.news/news/global-lng-trade-growth-australia-usa/

http://www.naturalgasintel.com/articles/114680-deadlines-looming-for-goldboro-canadas-long-promised-east-coast-lng-project

https://www.nrcan.gc.ca/energy/natural-gas/5683

China Surpasses South Korea in LNG Imports - Game Changer

China has become the world’s second largest importer of liquefied natural gas in 2017. By the end of November 2017, Japan is the world's largest importer, with South Korea as the third largest LNG importer. China's LNG imports have increased by 46% in 2017, according to Bloomberg News.  The Chinese government is encouraged to clean their smoggy air with cleaner source of energy, and shifting from using coal-burning furnaces to natural gas from households to manufacturers. Moreover, the Chinese government is supporting the movement by implementing the necessary infrastructure required for this transformation.

At this moment, China lacks the infrastructure to handle the demand for natural gas. Currently, China has 17 LNG import terminals at 14 ports along the coastline, which has substantially increased LNG regasification at their terminals within the past year. Therefore, according to multiple reports, China will become the world's largest importer, as early as 2025.

The steady increase of LNG demand would warrant further investment and expansion in LNG plants worldwide. LNG consumption is a growing trend among countries like China and India who are shifting towards a gas-based source of energy.

Typically, Japan and South Korea have bought LNG at discounted, long-term contracts, but China may be a game changer in the procurement process. Again, with the steady increase of LNG demand from China, and aggressive Chinese buyers, we may see a steady change in LNG production, demand, procurement, and regasification.

Rising US LNG Exports

Courtesy: EIA

Exports of LNG produced from US Shale gas have continued to increase and reached a new record in November. Sabine Pass LNG has single handedly transformed the landscape of US LNG export in addition to paving way for other future LNG projects.

According to the EIA, exports from Sabine Pass began to increase in September 2017 as Train 4 ramped up to full production. The overall capacity of operation across four trains was 96%. 

Sabine Pass Liquefaction plant is located in Cameron Parish on the US Gulf Coast near the Louisiana-Texas border. Currently the plant consists of four operational Trains with the fifth train under construction. When all six trains are complete Sabine Pass LNG would have a staggering capacity to produce up to 24 million tons of LNG per annum