In late February, the first liquefied natural gas (LNG) shipment left the United States. It sailed into an economically difficult global market with excess supplies of LNG, sluggish growth in energy demand, and exceptionally low oil prices against which global LNG prices are often set.
However, many analysts and policymakers see reasons to expect growing demand for U.S. LNG.
A July 2015 report by the Task Force on the U.S. Energy Boom and National Security chaired by Senators Lisa Murkowski and Mark Warner, “Empowering America: How Energy Abundance Can Strengthen U.S. Global Leadership,” enumerated some of the LNG demand drivers.
A January 2016 Atlantic Council report, “Surging Liquefied Natural Gas Trade: How U.S. Exports Will Benefit European and Global Gas Supply Diversity, Competition, and Security” authored by Bud Coote considered similar encouraging signs for U.S. LNG exports:
- European states want to diversify their oil and gas supply away from Russia, even as their need for imports increases because of declining domestic production.
- Asian demand will continue to grow faster than other regions, and Asian consumers want to diversify their supply from the Middle East. In addition, China may limit the volumes of gas it imports from Russia.
- Latin America and the Caribbean need a cost-competitive energy supply given the decline in Venezuela’s subsidized oil. The International Energy Agency (IEA) projects that these regions’ natural gas demand will outpace their production.
- Africa and India need low-cost fuels to generate electricity while reducing air pollution, especially in expanding urban areas.
Challenges to Growth Demand
However, growth in demand for U.S. LNG faces major headwinds: competition from coal and renewables, and a growing number of LNG suppliers and new liquefaction terminals. The United States and Australia dominate the development of new large-scale LNG export facilities.
Australia’s LNG export infrastructure is more developed than that of the United States – Australia’s first cargoes were shipped in 1989. In addition, the country is expected to add six new export terminals between 2015 and 2020 with a total capacity of over 70 billion cubic meters per year.
Australia and the United States will probably not be in direct competition, however:
- Most U.S. export facilities will come online later than those in Australia.
- Australian exporters are expected to ship exclusively to Asia.
- Most U.S. exports will originate on the Atlantic or Gulf coasts and will probably target Europe and the Americas, as long as global oil and gas prices are low.
Less Dependence on Russia
The opportunities for exporting LNG to Europe are looking up. In February, the European Commission (the executive body of the European Union) proposed new natural gas and LNG rules in its Security of Gas Supply strategy. The proposal should encourage U.S. exports in the interest of reducing dependence on Russian gas.
By way of background, natural gas is one quarter of EU energy consumption. Less than half of the EU’s gas needs are currently met by domestic production; the rest is imported, mainly by pipeline from Norway (30 percent), Russia (39 percent) and Algeria (13 percent). In recent years LNG has accounted for around 10 percent of natural gas imports, with most of that coming from Qatar, Algeria and Nigeria. In the future, EU gas consumption is expected to decline due to improvements in energy efficiency, but domestic production will also decline. One concern is that many EU states depend on a single gas supplier.
Currently, the EU has LNG import capacity to meet 43 percent of total 2015 natural gas demand, which is much more than it is using, but its LNG imports are not accessible to Baltic and eastern European member states.
The EC natural gas strategy aims to ensure energy markets function properly and there is a secure supply of natural gas within the EU. Pertinent elements that could affect LNG include:
- Infrastructure improvements to allow all states to access international LNG. Generally the Baltic central-eastern and southwestern regions lack diverse gas sources, large storage facilities and access to LNG. This goal will be helped by stronger regional coordination proposed in the draft regulations.
- Encouraging renewables and energy efficiency.
- Emphasizing LNG for diversification and competition.
The EC strategy notes that the 2015 Paris Climate Conference, COP21, favors renewables, but the EC recognizes the need for natural gas as bridge fuel, and the necessity to increase imports of natural gas as European production declines.
A few interesting questions that arise from the EC strategy is how Nord Stream II, a Russia-to-Germany pipeline through the Baltic Sea that could potentially come online in 2019, would contribute to EU diversification objectives.
One other area of interest is the 2016 Atlantic Council report’s observation that the fastest growing sector of natural gas use is transportation, including ships. This is only unexpected because low diesel prices have slowed the U.S. transportation sector’s adoption of natural gas. The International Association for Natural Gas, Cedigaz, projects that LNG use in heavy-duty vehicles will grow significantly in the United States, Europe and Asia. In addition, the International Convention for the Prevention of Pollution from Ships, (MARPOL), stimulates marine use of LNG, a cheaper alternative to low-sulfur oil-based fuels to meet new emissions limits.