Opinion

The US-China LNG Deal: Gulf Coast Boom or Bust?


There has been a lot of press about the recent Trump deal allowing state-owned companies in China to enter into long-term contracts with U.S. LNG exporters. It is expected that this agreement will disrupt the global LNG market by giving China the power to negotiate lower prices with Qatar and other top LNG suppliers that currently control pricing. Some analysts have also predicted that it positions the U.S. Gulf Coast for a LNG boom that could include facilities expansion, increased trade, and new Chinese investments.

There is little doubt that the agreement will create a shift in worldwide LNG pricing. As it relates to a Gulf Coast LNG boom, however, several factors indicate that a Gulf Coast LNG bust may be more likely.

The fact of the matter is China does not have to import Gulf Coast LNG to reap the benefits of the new arrangement. The existence of the deal alone is a powerful bargaining tool, and merely mentioning it during contract negotiations with current suppliers will probably be enough to secure China more favorable pricing. This will make it difficult for the U.S. to get a bigger piece of the pie, especially since American exporters set the price of LNG to the Henry Hub natural gas index, while the rest of the world prices gas against Brent crude. Historically, the growing Gulf Coast natural gas supply has kept the Henry Hub price low, making contracts with the U.S. desirable – but those prices have started to climb over the last year.

In addition, the LNG market is on the cusp of a deepening supply glut that according to consulting firm PIRA Energy will peak in 2018 due to new production from the U.S. and Australia. And Bloomberg New Energy Finance reports that annual global production capacity will grow to 407 million tons by 2020, compared with projected demand of about 274 million tons. LNG exporters are already struggling with soft demand and low prices, and this scenario indicates that the challenges they face will only intensify as new LNG plants approved earlier this decade commence operations over the next few years.

Several LNG companies have seen the proverbial writing on the wall. Banking firm FBR has noted that applications for six U.S. export terminals have been withdrawn since 2014, and it's no coincidence that during this same time span, Asia LNG prices have fallen 56%.

It is also questionable as to whether China's demand for LNG will reach the heights predicted by various analysts. Energy research firm Wood Mackenzie expects that Chinese LNG demand will reach 75 million metric tons per year by 2030, which is triple 2016 imports and equivalent to $26 billion per year at today's prices. However, according to advisory firm RBN Energy, whether this level of growth materializes depends on several variables including how the role of coal evolves in China's energy mix, natural gas pipeline imports from Russia, and the potential adoption of the same drilling methods that the U.S. is using to gain energy independence.

Yet another potential barrier to a U.S. Gulf Coast LNG boom is logistics. Shipments from the Gulf must travel through the Panama Canal or cross the Atlantic, which makes it a less attractive option than countries like Australia and Qatar that are much closer to China, and therefore have lower transportation costs and shorter shipping times. It is due to these considerations that S&P Global Platts has stated it's more likely that Gulf Coast LNG will primarily go to Europe.

Navigating LNG Market Uncertainty
While the above issues indicate that a Gulf Coast LNG boom may never come to fruition, at the end of the day, the numerous variables in play make it impossible to say with any certainty that Gulf Coast LNG will be a complete bust. The fact is, the only thing we can count on in an environment fraught with many unknowns and a high level of geopolitical risk is a lot of ambiguity and volatility. In order to remain profitable and competitive, LNG producers and users must have complete control over the supply chain and access to real-time intelligence that drives smarter, faster decision-making.

Eka's liquefied natural gas trading and risk software improves operating margins and increases efficiency by providing traders, risk managers, schedulers and accountants with full visibility into all aspects of the LNG supply chain from original trade to final destination. The platform provides real-time data and critical business intelligence for optimizing decisions around trade execution, position management, and scheduling. Using Eka's advanced ETRM solution to manage the entire natural gas lifecycle enables participants across all aspects of the LNG value chain to mitigate the effects of market volatility and succeed in an increasingly competitive market.



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