Exports of LNG from the US and the «White Elephant» of Australian LNG Projects
Igor TOMBERG 04.03.2016 14:00

It’s finally happened! For so many years the world has been alternately frightened, reassured, and blackmailed by the idea of European and Asian markets getting massive amounts of American liquefied natural gas (LNG) sourced from shale. And now that has come to pass.

On Feb. 25 the US company Cheniere Energy Partners, the owner-operator of a liquefied natural gas plant in Cameron Parish, Louisiana, dispatched the first American tanker carrying liquefied natural gas destined for export. Announcing this event, the company’s statement noted that this first shipment on an LNG tanker «marked a new era for the US LNG sector». Neal Shear, the company’s chairman of the board, also stated with fervour, «This historic event opens a new chapter for the country in energy trade and is a significant milestone for Cheniere».

Despite the elation of the LNG producers, the American government’s reaction to this event has been quite subdued. It was noted that «effects on overall economic growth [from the emerging LNG market] were positive but modest».

Commenting on this noteworthy event, reputable Western sources have been less reticent, calling the first US LNG exports «long-anticipated, yet odd». The Feb. 26 edition of the Oil & Energy Inside weekly report remarked«The cargo [is] headed for Brazil, a curious destination after years of speculation that the US could take advantage of high LNG landing prices in Europe and Asia».

However, the biggest oddity noted by many observers was that this first export shipment of US LNG took place during a time when prices for natural gas, including LNG, are in a steep decline (see the chart below). «The landmark event comes at a bad time for LNG exporters», commented the report. «Abundant and growing supplies are running into a wall of flat demand, and prices have crashed. The oversupply could take years to abate».

Low prices are having a calamitous impact on the state of the entire US oil shale industry. Royal Dutch Shell has shut down its shale resources unit. Last week, Continental Resources announced a 10% cut in production, as did Whiting Petroleum (by 15%), Devon Energy (10%), and Apache Corp. (over 10%). In its annual oil market report, the IEA predicts that US shale oil production will decline by 600,000 barrels per day in 2016 alone, although given the fact that all companies are reducing production, that forecast is probably too conservative. When it comes to shale gas, the picture is even more grim.

The fall in global prices for LNG

Source: HotStockMarket

The Gorgon project in Australia, the world’s most expensive gas liquefaction project jointly financed by Chevron, Shell, and ExxonMobil, is near completion. Given the falling spot prices for LNG, that venture is starting to look like a «white elephant», although the companies involved are still confident that the project will pay for itself in 40 years. Yet analysts have their doubts about that. Neil Beveridge, a senior analyst at Bernstein Research in Hong Kong, has noted that «paying down that $54 billion capital charge, [is] going to take an awful long time, if ever».

And another six Australian LNG projects are in the pipeline and scheduled for completion next year. Projects are also wrapping up in other parts of the world, which will definitely max out the competition for sales markets for any type of gas.

Given this state of affairs, Russia – the world’s biggest gas power – is also finding itself confronted with the negative consequences of falling gas prices. The gas industry shouldn’t be rushing into anything right now, or else Russia might find itself with its own «white elephant» – and at a cost of billions. It makes sense to try to buy time, with an eye to the future normalization of oil and gas prices.

According to the Feb. 22 report by the International Energy Agency (IEA), the market is projected to stabilize by 2018. And price increases will be limited by new market factors. During his speech at the IHS CERAWeek international oil and gas conference in Houston, Abdalla Salem El-Badri, the secretary general of the Organization of Petroleum Exporting Countries (OPEC), stated«Any increase in price, shale will come immediately and cover any reduction (in production)». According to El-Badri the oil markets have never before been in such a complicated predicament. «If prices go up in 2017 and 2018, the price rally will be checked by US shale oil», he explained. «The situation has changed».

But shale production has a break-even price of $60-70/bbl. If they can get that, the currently stricken shale companies in the US will happily bring online the 4,000 wells they have already drilled, which will surely upset the equilibrium. But that $60-70/bbl is still better than the current price of $35. Which explains why Russia is holding off on big projects with deferred delivery times, waiting for better days, which is the best solution for now. Of course one also has to be keeping a close eye on all the markets so as not to lose one’s own. LNG is going to get increasingly competitive.