Energy companies rushing to ship liquefied natural gas to Asia face a familiar pitfall in the boom-bust cycle of commodity prices: the potential for too much supply.
With plans for dozens of the multibillion-dollar export terminals in North America alone, the industry is headed toward an overbuild that may depress Asian prices for a decade, according to a Rice University analysis. Capacity from proposed North American LNG terminals is more than triple the forecast growth in Asian gas demand by 2020, data from HSB Solomon Associates LLC’s Ziff Energy Group show.
“Capital flows to where it sees opportunity and everybody’s trying to grab that flag first,” Kenneth B. Medlock III, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy in Houston, said in a March 3 interview. “What happens is that you see too many people trying to grab the flag.”
Exxon Mobil Corp., Chevron Corp. and Cnooc Ltd. are among companies that have proposed projects to export LNG to Asia, where gas prices are five times higher than in North America. A boom in output from shale-gas formations drove the price of gas to a decade low in the U.S. in 2012.
The liquefaction buildout may start lowering Asian prices for the fuel after 2016 as U.S. projects come online, Australian supplies rise and Japan boosts the amount of power it gets from nuclear energy, Greg Pardy, an analyst at RBC Capital Markets in Toronto, wrote in a Feb. 25 note.
Vying for Customers
“Not everybody accepts the fact that time is of the essence, but it’s overwhelmingly clear that it is,” Canadian Minister of Natural Resources Joe Oliver said in an interview yesterday at the IHS CERAWeek conference in Houston. Canadian projects face competition from the U.S., Australia and other nations vying to supply Asian markets.
Construction has begun on the first U.S. Gulf of Mexico export facility, as Chevron and others ponder final investment decisions for projects on Canada’s Pacific Coast. Gulf Coast LNG supplies may have a “transformative impact” on the global market, Pardy wrote.
The industry won’t overbuild LNG export capacity because the facilities are too expensive to do without signed contracts from buyers in hand, John Watson, chairman and chief executive officer of Chevron, told reporters yesterday after speaking at the CERAWeek conference. Many of the proposals will fall away without guaranteed buyers so supply won’t exceed demand, he said.
“Even companies the size of Chevron don’t build LNG plants without having contracts in hand,” Watson said.
Irrational exuberance in the LNG industry has occurred before. Many of the U.S. LNG export proposals are reconfigurations of import facilities that became redundant after producers were able to extract vast supplies of the fuel from North American shale, overwhelming domestic demand and deflating prices.
When the industry was pushing for import terminals, only five of the 45 applications submitted to regulators were actually built, Christopher Smith, assistant U.S. energy secretary for oil and gas, told reporters at the conference today.
For export terminals, “we know categorically that they will not all get built.”
BP Plc forecasts that Asian LNG prices will stay at a premium to other regions because of rising demand after the shutdown of nuclear power plants in the wake of the Fukushima meltdown in 2011, Christof Ruehl, chief economist for the London-based company, said yesterday in an interview in Houston.
Long-term purchase contracts may come under pressure if a spot market for the liquefied fuel is developed that gives buyers access to cheaper gas not linked to oil prices, Ruehl said. “That would have big consequences for the use of gas,” he said.
BG Group Plc, which has agreed to buy LNG from a Cheniere Energy Inc. project in the U.S. and proposed another in Canada, doesn’t see a coming oversupply, CEO Chris Finlayson said at the conference today. There is “significant upside” to current LNG demand forecasts, Finlayson said.
The “first wave” of U.S. LNG will amount to 9 billion cubic feet a day, about 15 percent of the global LNG marketplace by 2020, said Michael Smith, chairman and CEO of Freeport LNG Development LP, which is building an export facility in Texas.
“The world’s going to need it,” Smith said in an interview at the conference yesterday. “The appetite for LNG just keeps growing and growing.”