Energy Fact & Opinion: U.S. LNG Arrives in China
September 9, 2016
- On August 22, China received its first shipment of liquefied natural gas (LNG) from the United States. This supply of natural gas was produced and liquefied in the United States, distinguishing it from the non-U.S.-sourced LNG reexported by the United States to China in the past.
- This U.S. LNG shipment marked the 19th cargo to load from Train 1 of Cheniere’s Sabine Pass export facility in Louisiana, which was the first LNG export facility to be developed since the commercial-scale production of shale gas took off about a decade ago.
- This shipment from the Sabine Pass was chartered by Royal Dutch Shell, which has offtake of 3.5 million metric tons per annum (mtpa) from the 4.5 mtpa capacity Train 1.
- The cargo was not only the first to arrive in Northeast Asia but also the first to travel through the expanded Panama Canal after it reopened in late June. The expanded canal shortens the distance between the U.S. Gulf of Mexico and Asia from roughly 16,000 miles to 9,000 miles.
During the period of high oil prices and high natural gas prices in Asia earlier this decade, a few companies from gas-hungry Asian economies signed purchasing agreements or tolling agreements with U.S. LNG producers. Notably absent in the wave were Chinese companies. Some speculated that U.S. national security scrutiny was deterring Chinese investment interests in U.S. LNG export projects. Others, however, pointed to the presence of pipeline gas imports (from Turkmenistan and Burma, for example) and domestic unconventional resources as key reasons why Chinese companies were not eager to sign up for U.S. LNG supplies. Yet others wondered about the possible impact of Beijing’s anticorruption campaign on Chinese business decisions to make large-scale investments abroad.
Whatever the true reason—and the truth likely rests somewhere in between—the absence of Chinese investment in U.S. LNG export terminals never precluded U.S.-produced natural gas from arriving in the largest gas-hungry economy in Asia. Free of destination restrictions common in traditional LNG contracts, U.S. LNG can be shipped to wherever the market conditions are right. In the period of low oil prices around the world and low spot LNG prices in Asia, a greater volume of U.S. LNG has traveled to non-Asian markets than expected a few years ago. In fact, about 10 cargos from the Sabine Pass terminal have gone to South America and several each to the Middle East and Europe.
According to Bloomberg, of the 42.9 mtpa liquefaction capacity coming online in the United States by the end of this decade, a little over half is currently contracted to electric utilities and national oil companies in Japan, South Korea, India, Taiwan, and Singapore. The rest does not have a set destination, as one-fifth is held by portfolio buyers, such as Shell, and one-third is either simply uncontracted or held by project investors. When and by how much global oil prices rise is the key determinant not only for the destination of the uncontracted or portfolio volumes, but also for the overall competitiveness of U.S LNG. The recovery in global oil prices can help improve the competitiveness of U.S. LNG against the oil-linked LNG supplies from traditional LNG exporters.
While U.S. LNG awaits improved market conditions, coming to the aid of U.S. LNG exports is the expansion of the Panama Canal, which was completed in late June. The widened locks now allow up to 90 percent of the current LNG tankers in the world to transit—a significant increase from only 6 percent pre-expansion. Consequently, LNG shipments from the U.S. Gulf Coast now enjoy a shorter travel time to Asian markets—although not to the emerging gas importers like India and Pakistan—when transiting the canal. For example, a journey from the U.S. Gulf Coast to Japan through the Panama canal will take 20 days; in comparison, the journey will take 34 days around the southern tip of Africa and 31 days through the Suez Canal. Meanwhile, it is hard to tell to what extent the canal expansion will increase the volume of uncommitted U.S. LNG exported to Asia, as the expansion has also led to a significant reduction in the travel time from the U.S. Gulf to Latin American destinations like Chile and Colombia, in addition to the fact that about 53 mtpa of new liquefaction capacity is coming online by 2020 in Australia, which has the advantage over the United States in terms of distance to the Asian markets.