Is LNG The New Oil?: Energy Transformation

Is LNG The New Oil?
 1 Mar 2019
The global LNG market is currently one of the fastest growing sectors in the energy industry and will likely continue to evolve in the
next few years.
The emergence of new major export and import players has altered the patterns of the international gas trade and brought a new
geopolitical dimension to the LNG trade. The transformed landscape has compelled some countries to reshape their foreign policy in
accordance with their energy strategy.
The LNG market is increasingly affected by international relations as much as by supply and demand. Perhaps it is time to ask
whether LNG is becoming the new oil?
Energy Transformation
LNG is playing an increasingly important role in the global energy mix, driven by its environmentally friendly characteristics,
versatility, and relatively cheap price. LNG is perceived as a transition fuel that can facilitate countries’ move towards cleaner energy.
The drastic change in availability, in particular the emergence of the U.S. as a major player in the space, has been the impetus for
countries to shift their business model and to form new alliances in order to achieve energy security and supply diversification.
U.S. Energy Security

The U.S. natural gas production boom has produced both commercial and strategic benefits. The abundance of natural gas offers
energy security and provides the U.S. with geopolitical leverage. Energy security offers self-sufficiency and less dependence on
foreign energy. In 2017, for the first time in approximately 60 years, the U.S. became a net natural gas exporter on an annual basis.
According to an Energy Information Administration (“EIA”) report, net natural gas exports averaged 0.87 (Bcf/d) in 2018, more than
double the average daily net exports during all of 2017 (0.34 Bcf/d).
The U.S. is expected to be the third largest LNG producer in the world after Australia and Qatar once all its planned projects come
online. In 2018, the Sabine Pass and Cove Point terminals produced approximately 5 Bcf/d of LNG. The EIA expects that production
levels will grow to 8.9 Bcf/d by the end of 2019 as the second wave of projects become operational. In late 2018, Cheniere was
ahead of schedule and expanded an additional train in the exiting Sabine Pass terminal and kicked off the commissioning of its
second terminal, Corpus Christi in Texas. Cameron LNG in Louisiana and Freeport in Texas are planned to follow while Elba Island
in Georgia is scheduled for the end of year. Other projects including Magnolia LNG, Hackberry, Lake Charles, and Golden Pass are
in different stages of approval and the Final Investment Decision (“FID”) process.
Chart 1: LNG Supply/Demand Forecast
Cheniere Investor Presentation – May 20181
Chart 2: U.S. LNG Export Capacity By 2021
The U.S. is not only exporting LNG but also its market-based approach. This includes its flexible contractual framework
and its competitive pricing model that relies on its national benchmark Henry Hub at the expense of the traditional oil
indexation mechanism.
Historically, LNG market structure has relied on long-term rigid agreements with destination restriction clauses which
prohibit the buyer from reselling cargoes in a secondary market to capture any arbitrage opportunity. The rigidity of
destination clauses made each bilateral transaction unique and prevented LNG from becoming a homogenous
competitive commodity. However, the new wave of U.S. LNG export projects is structured around a market-based model
founded on flexible agreements with destination optionality provisions. This contractual framework is revolutionary
because it has induced some importers to renegotiate their existing contracts and has stimulated LNG spot trading.
New Geostrategic Implications

The global shift in energy supply and demand dynamics has also consequently affected the traditional relationship
between importers and exporters. Heightened environmental concerns have encouraged emerging economies such as
China, South Korea, etc. to increase their LNG import volumes. Additionally, technological breakthroughs have facilitated
the developments of floating storage and regasification units (FSRU) which are cheaper substitutes for traditional capital-
intensive terminals. These facilities have allowed mid-size participants such as Brazil, Argentina, Egypt, Israel etc. to join
the once-exclusive global LNG “club.”
This new market reality and the competitiveness of U.S. LNG exports have encouraged some political rhetoric suggesting
that U.S. could potentially displace Russian gas in Europe and even in Asia. Europe relies heavily on Russian gas, -
especially Eastern Europe and Germany. U.S. LNG export projects are economically favorable and more competitive
compared with projects in the rest of the world, as illustrated in chart 3. U.S. brownfield LNG development projects require
lower capital expenditures and are coupled with inexpensive feedstock gas.
U.S. LNG exports are creating a new playing field where the development of U.S. LNG exports is now a factor in
negotiations. U.S. LNG production has a relative cost edge and its prices can act as a ceiling to the LNG price globally as
well as offering increased supply diversification and energy security to importing countries.
Chart 3: Different Fuels Futures Prices
To face the intense competition from US LNG, Russia has taken a few steps to adjust its gas strategy for example (1) introducing
a hybrid formula to its traditional oil indexation system and allowing its state-owned energy company Gazprom to sell LNG at
“unregulated” prices, (2) continuing to invest in more pipeline expansion like Yamal to China through Siberia or Nord Stream 2 from
St. Petersburg to Germany, which has been a very contentious project.
Another example of the effect of the new competition is the case of Lithuania which received its first U.S. LNG cargo in August 2018.
The arrival of the shipment was welcomed with a formal ceremony attended by government officials. The U.S. State Department
tweeted a congratulatory message to the importing country. Although it was a single cargo, this transaction had a symbolic
geopolitical significance since Lithuania was part of the former Soviet Union.
Additionally, Poland’s main state energy company, PGNiG, signed a 20-year contract with major U.S. LNG producers and
announced their intention not to extend their long-term contract with Moscow, which is due to expire in 2022. These examples reflect
that U.S. LNG presents an optionality advantage which is driving some countries to shift their energy policy to diversify supply at a
competitive price while decreasing their heavy reliance on Russian gas. The European market can potentially become a battlefield
for gas preeminence between US and Russia.
Giant LNG producers such as Qatar, Nigeria, Algeria etc. have also felt the winds of change and mounting pressure from the U.S.
and Australia, the new strong competitors with world-class liquefication facilities, and have started to invest in new capacity. For
example, in April 2017, Qatar, the world’s biggest LNG producer, announced that it had lifted a 12-year moratorium on new projects
to produce 20 bcma of LNG. The move appears designed to preserve Qatar’s competitive edge and market share, which industry
observers have suggested could be eclipsed by the new entrants. As shown in chart 4 below, the U.S. will likely account for almost
one quarter of global gas production, overtaking the Middle East.
Chart 4: Global LNG Exports
BP Outlook Report 2018 2

The lifting of the moratorium came after a major consolidation of Qatargas and RasGas under the umbrella of Qatar
Petroleum as a measure to streamline production, cut costs, and enhance competitiveness. Qatar has also revamped its
foreign investment energy by acquiring assets in major countries. The latest example of such investments is the
partnership between Qatar Petroleum and ExxonMobil to build the $10 billion Golden Pass LNG Terminal. The signing
ceremony was attended by U.S. Secretary of Energy Rick Perry, Qatar’s Minister of State for Energy Affairs, CEO and
President of Qatar Petroleum, H.E. Saad Al-Kaabi, and ExxonMobil Chairman and CEO Darren Woods. The high-profile
investment can be perceived as a way for Qatar to cement its relationship with Washington.
On the Asian side, U.S. LNG faces a major challenge in China, the biggest LNG consumption market. The U.S.-China
trade war has hammered traded volumes due to the retaliatory 10% tariff that China imposed on US LNG. For example,
China received only 6 cargoes from the US from June 2018-December 2018 compared with 25 during the same
timeframe in 2017.
The New Gas Order

The new ecosystem has positioned LNG in the realm of international relations and political narrative. The U.S. LNG
industry is competitive, funded by private capital, and driven by entrepreneurship. LNG trading is typically based on the
laws of supply and demand, and the geopolitical dimension manifests itself only where there are political or geographic
considerations between the two parties. Unlike in many producer nations, the role of the U.S. government has been solely
to define the regulatory/policy framework and conduct energy diplomacy. For example, the U.S. government has
undertaken some steps to ensure that policies provide a flexible framework and promote a market-based approach.
Officials made announcements about relaxing some requirements and shortening the lengthy approval process, in
addition to hiring supplementary LNG staff to cover the new export facilities.
It is remarkable how the entrance of the U.S. with one export terminal has given birth to a new market paradigm in the
span of just three years. As the second wave of U.S. export projects is expected to make a big splash in the next few
years, the old regime is more likely to endure more erosion marking the development of what some have termed a ‘New
Gas Order’.
Conclusion
The LNG market is experiencing a profound transformation driven primarily by new developments in supply and demand
fundamentals. Due to the growing importance of LNG as a key fuel for the global energy mix and its implications for
energy security, LNG has begun to be viewed through a geopolitical lens in a similar way to oil. While oil and LNG may
have both similarities and differences, the one common factor they both share is that both are a part of international
political discourse.

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Is LNG The New Oil?

U.S. Energy Security

New Geostrategic Implications

BP Outlook Report 2018 2

The New Gas Order

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