Tanker's U-Turn Shows How Shale Is Changing World Gas Trade

  • In new world order, China and Mexico vie for a tanker of gas
  • LNG market more fragmented with a spot market akin to oil

OPEC Producers Court Shale as Oil Prices Surprise

A cargo of chilled natural gas hauled from Louisiana in late December has become a symbol of how global trade is changing for a fuel increasingly seen as a cheap, cleaner-burning option for countries from Latin America to China and India.

The tanker Maran Gas Achilles passed through the Panama Canal and was headed toward Asia at a speed of 20 knots when, suddenly, it made a sharp u-turn in the Pacific. Next stop: Mexico’s Manzanillo terminal on the southwest coast, where it unloaded.

The abrupt route change shows how the U.S., which began shale gas exports just last year, is creating a new paradigm in an industry that once revolved almost entirely around long-term contracts with set destinations. As the new kid on the block, exporters of U.S. liquefied natural gas -- led by Cheniere Energy Inc. and Royal Dutch Shell SA -- are seeking the best price at any given time. As U.S. exports grow, it’s a strategy that could shift the economics of LNG toward an emerging spot market akin to oil.

“The U.S. puts gas into places on short notice at a good price,” said Jason Feer, head of business intelligence at ship broker Poten & Partners Inc., in a telephone interview. “It’s been flexible. The market’s becoming more short term and the U.S. has been very effective at meeting those needs.”

The U.S. stands to become the world’s third-largest exporter by 2020, when it’s expected to ship about 8.3 billion cubic feet a day of capacity, or 14 percent of the world’s share, according to London-based consultant Energy Aspects Ltd. That growth is a testament to the power of the shale boom of the last decade, helping to reduce the country’s reliance on foreign energy sources.

Supply Glut

U.S. natural gas futures rose 2.7 percent to settle Thursday at $2.901 per million British thermal units on the New York Mercantile Exchange, compared with the latest assessed spot LNG price in Singapore of $5.652 as of Monday.

Drilling technologies such as hydraulic fracturing have made it profitable to tap vast resources of carbon fuels trapped in rock thousands of feet below the surface. The results: A natural gas supply glut stuck stubbornly in place since mid-2015, and billions of dollars redirected toward new export facilities by Cheniere, Dominion Resources Inc., Kinder Morgan Inc. and others.

Breanne Dougherty, a natural gas analyst for Societe Generale SA in New York, calls the U.S. push into the global LNG market “an inarguable game changer.”

Having gas delivery that isn’t fixed by destination represents a new type of supply that will undoubtedly lead to more flexible contracts being signed elsewhere around the world, according to Dougherty. U.S. terminals made another key break from the global norm by pricing LNG off of the country’s benchmark Henry Hub in Louisiana instead of tying it to the price of oil, she said.

First to Ship

Cheniere, which built the Sabine Pass terminal in Louisiana, was the first to ship shale gas abroad. The Houston-based company is now in the process of starting up its third plant and is expected to own 7 percent of the world’s export capacity in 2020, according to Energy Aspects.

In its debut year, Cheniere shipped 56 cargoes to 17 countries, including Mexico, China, and India. Last week, it reported its first quarterly earnings gain since 2010.

“We continue to be pleasantly surprised by the speed and magnitude” of demand, said Anatol Feygin, Cheniere’s chief commercial officer, during a conference call last week. “China and India underscored their potential to quickly increase LNG demand and tighten global markets.”

Just a year ago, Cheniere was at CERAWeek by IHS Markit, the energy industry’s yearly get-together in Houston, to talk about the launch of its first tanker from Sabine Pass.

Fegyin is scheduled to present at this year’s meeting on Wednesday, a week after the company’s announcement that it has secured its first deal to tap Canadian shale to supply its LNG production, expanding its influence as one of North America’s largest gas buyers.

Prior to the start of U.S. exports last year, Asia and Europe were seen as the likeliest customers. Gas production in Europe is declining as demand grows and, in some cases, countries have expressed a desire to displace pipeline imports from Russia, seeking to diversify their supply at a time of unsettled geopolitics, according to Dougherty, of Societe Generale.

However, while analysts and traders watched whether Europe would emerge as a big buyer, Mexico, which already imports the most U.S. gas by pipeline, quickly became the largest importer of shipped-in LNG from the U.S., followed by Chile. China, South Korea and Japan boosted buying during the winter. Perhaps the most unexpected customers were in the Middle East, as Jordan, Egypt and the United Arab Emirates took in tankers in the backyard of the world’s largest supplier, Qatar.

Dominion is expected to join the fray as a U.S. exporter by the end of this year, with its Cove Point terminal in Maryland bringing the nation’s export capability to about 3.2 billion cubic feet a day, according to Energy Aspects data.

For natural gas, it’s “a new world order” that not only promises to establish the U.S. as the swing provider, but also allows emerging countries to take advantage of low prices, said Ted Michael, an LNG analyst with Genscape Inc.

Floating Factories

Egypt, Jordan and Pakistan are already taking advantage of the change by using tankers docked at their shores that are basically floating factories, able to convert chilled fuel shipped into the country back into gas so it could be distributed on their pipelines. Outfitting ships with regasification plants are a third of the cost of building an onshore facility, and can be installed in a quarter of the time.

“The revolution has many moving parts,” Michael said. The broadening of outlets for exported gas could “easily” help boost U.S. gas output by about a third to 100 billion cubic feet a day in the next five years, he said.

The real test for U.S. LNG will be in 2018 when Dominion’s Maryland terminal begins operating along with Gulf Coast terminals planned by Freeport LNG Development LLC and Cameron LNG, said Madeline Jowdy, senior director of global gas and LNG at Pira Energy Group in New York.

“U.S. LNG has come on fairly quickly without any glitches,” Jowdy said by phone. “That’s great. You can’t take that for granted in terms of LNG production. I’m a little surprised they were able to place all the cargoes they were able to place.”

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