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Vista Projects
Copper Tip Energy Services
Vista Projects
Copper Tip Energy

LNG is the new shale oil with the U.S. as disruptor-in-chief: Russell

These translations are done via Google Translate

LAUNCESTON, Australia, March 13 (Reuters) – Crude oil is likely to spring to mind if one is asked to name a commodity where the United States is disrupting the market by becoming a swing producer and challenging traditional trade flows, especially in fast-growing Asian markets.

But it’s increasingly likely that the United States is about to play the same role in liquefied natural gas (LNG), as it ramps up production in an already well-supplied market.

Much has been written recently about how the expected glut in LNG supply is unlikely to materialise, given the rapid growth of demand for the super-chilled fuel in Asia, especially in China, which is now second only to Japan as an importer.

Major producer Royal Dutch Shell warned last month of an impending supply gap that will need more than $200 billion of investment by 2030 as the natural gas market grows faster than that for any other source of energy.

There is nothing wrong with Shell’s bullish forecast, and there is certainly renewed interest around the world in developing LNG projects to meet forecast demand.

Investment in LNG projects fell off a cliff in recent years as the industry dealt with the ramifications of rapid supply growth, which has seen Australia add eight new large-scale plants, while the United States is busy commissioning the second of its new export projects, with five more to come by 2019.

While Shell and others may well be correct about the need for new plants to meet demand by 2030, it’s the next couple of years that could prove challenging for the LNG industry.

Most of the new capacity built in Australia was done under the old industry model where long-term offtake contracts, often linked to crude oil prices, allowed for the financing of billions of dollars of capital investment with extended payback terms.

The model has been somewhat different in the United States, with far less of the upcoming production committed to buyers, meaning more will be sold at spot prices linked to U.S. benchmark Henry Hub natural gas.

This is where the role of the United States in LNG starts to look eerily similar to the role its shale oil producers are playing in crude oil markets.

Traditional exporters, such as Saudi Arabia and Russia, have found it tougher than expected to push crude oil prices higher, mainly because customers, especially in Asia have been able to turn to alternative suppliers.

While the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, have met some success in draining excess global crude inventories, it’s come at the expense of market share in the fast-growing Asian demand region.


This can be seen in the customs data for China, the world’s largest crude importer.

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In 2017, Saudi Arabia’s share of China’s imports was 12.4 percent, a drop from 13.4 percent the prior year. The share enjoyed by the United States, meanwhile, rose from 0.13 percent to 1.84 percent.

While the United States is far from a major threat to Saudi Arabia in Asia, when you add in gains by other smaller exporters not part of the OPEC and allies output-cutting deal, it starts to add up.

Brazil’s share of China’s crude imports rose from 5 percent in 2016 to 5.5 percent last year. Shipments from Britain went from 1.3 percent to 2 percent in 2017.

Just as shale as roiled crude oil markets, it’s likely that U.S. shale gas will have the same effect, at least until demand growth eliminates the coming supply surplus.

The United States will add about 50 million tonnes of annual capacity by 2020, assuming all the projects currently under construction are delivered on schedule.

China sourced 45.4 percent of its LNG from Australia and 19.7 percent from Qatar in 2017, and just 3.9 percent from the United States.

But China’s imports of 1.5 million tonnes of LNG from the United States in 2017 was 661 percent higher than for the previous year, and the risk is that as new U.S. output comes online, it will aggressively compete in Asia.

While Chinese demand for LNG has surprised to the upside, with growth of 46.4 percent to 38.1 million tonnes in 2017, it still may be a challenge for the market to absorb all the additional tonnes, not just from the United States but also from smaller projects, mainly in Africa.

Like the rise of shale oil as an export force, the coming U.S. LNG wave will disrupt traditional flows across the globe.

Similar to shale oil, U.S. LNG is being produced and exported from the Atlantic Basin, but the overwhelming growth in demand is in Asia.

While U.S. LNG will be competitive in Latin America, it also will likely displace cargoes from Qatar in Europe, meaning the world’s top producer of LNG will be forced to sell more in Asia, just as Australia is snapping at its heels for bragging rights at the biggest exporter.

A buyer-led shift to more flexible contracts will see traditional relationships stretched, as will the increasing activities of trading houses keen to get in on the market.

Seasonal demand volatility, particularly from China, will also serve to test the market, with the likelihood that the winter peak will be bigger than before, with the attendant risk that the shoulder seasons either side of cold weather will be weaker.

Overall, the LNG market is going to have to adapt to the arrival of U.S. production, but where liquefied gas differs from crude oil is in not having an established producer group that can coordinate a response.

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