U.S. LNG 2.0 Takes Shape

The United States will have its best year yet when it comes to liquefied natural gas (LNG) exports. By year-end, most of the projects sanctioned from 2012 to 2015 will be online, firmly establishing the United States as the world’s third-largest LNG exporter. Meanwhile, the next wave of projects is taking shape. In the first quarter of 2019, one project took final investment decision (Golden Pass) and another started construction (Calcasieu Pass)—which already makes 2019 the best year ever for new project sanctioning in the United States. Even more projects are in the queue, and some are progressing rapidly. There are clear similarities between the first wave of U.S. LNG projects and the second—but also some important differences.

The most obvious commonality is that the investor appetite for U.S. LNG has not diminished. The competitive landscape for LNG is far more intense than it was in 2012-2015, so the United States is unlikely to dominate as it did back then. But there is no sign that suppliers or buyers are shying away from U.S. LNG. When U.S. LNG projects were first proposed, there were several risks that investors worried about—export approvals, environmental permitting, pricing, revocation of approvals, transit via the Panama Canal, and others. Almost seven years after the first project in the Lower 48 was sanctioned, the market continues to have faith in U.S. LNG.

The appetite for U.S. LNG, however, has evolved. The first wave of projects was based on a Henry Hub-plus model. There are still agreements on that basis, albeit at a lower pricing point. But companies are also testing new ideas. NextDecade has signed a contract to sell LNG on a price partially linked to Brent, and it is offering contracts linked to other U.S. hubs besides Henry Hub. Tellurian inked two deals with a price linked to the Japan Korea Marker (JKM), and one deal to deliver LNG on a variable-cost basis in exchange for an equity investment. So while the appetite for U.S. LNG remains, companies are tweaking the offering to capture a market that continues to evolve.

The customer base is shifting too. Cheniere has built a sizeable portfolio of contracts to underpin its ambitions—it signed the first long-term contract with a Chinese buyer (PetroChina) but also concluded deals with CPC (Taiwan), PETRONAS (Malaysia), as well as traders Trafigura and Vitol. European buyers have stepped up too—especially PGNiG (Poland), which wants to eliminate its dependence on Russian gas, but also Repsol (Spain), Enel (Italy) and Galp (Portugal). ExxonMobil, in partnership with Qatar Petroleum, made its first foray into U.S. LNG. There are some repeat players, of course, but U.S. LNG is succeeding in part by broadening its customer and investor reach.

At the same time, a stronger U.S.-China relationship on LNG remains elusive. The Cheniere-PetroChina contract, mentioned above, remains the exception, not the rule. Another contract, between Cheniere and Sinopec, is supposedly on the works (reportedly delayed by the lack of a trade deal between China and the United States). ENN (China) agreed to buy Toshiba’s (Japan) position in the Freeport LNG project, but the deal was later canceled, reportedly because ENN was unable to secure authorization from the Committee for Foreign Investment in the United States (CFIUS)—a signal, if true, of how uncertain the terrain is for a closer U.S.-China partnership, even in a win-win sector like LNG. The rapprochement between Alaska LNG and Chinese counterparties is likely being upended by a change in state administration and a resultant rethink about how the project should be structured, and whether the model that envisioned a heavy Chinese role will continue. China Gas Holdings signed a memorandum of understanding with Delfin LNG in 2017, but that has yet to materialize. In short, like the first wave, the second wave of U.S. LNG projects is likely to be anchored by non-Chinese buyers, even if some of the gas is delivered to China anyway.

The geography of U.S. LNG has changed a bit too. The first wave was largely concentrated in Texas and Louisiana, with only two projects being built elsewhere: Cove Point in Maryland, and Elba Island in Georgia. The second wave is retrenching almost fully to Texas and Louisiana. The Alaska LNG project is moving along at the Federal Energy Regulatory Commission (FERC), but its commercial structure is in doubt following a change in state administration. The Jordan Cove project in the West Coast continues to work its way through FERC too, but it faces a number of challenges. So the center of gravity of U.S. LNG will likely remain in Texas and Louisiana.

At the same time, surplus U.S. gas is helping non-U.S. projects advance as well. LNG Canada in British Columbia was sanctioned in October 2018, and while it will not use U.S. gas, its fortunes are clearly related to the abundance of gas in the United States. Meanwhile, Sempra is advancing its Energía Costa Azul project in Baja California in Mexico, designed to leverage Permian gas. The company selected contractors in June 2018, signed three offtake agreements in November 2018, and secured export approvals from the U.S. Department of Energy in March 2019. The second wave of LNG projects will thus be a North American wave, not just a U.S. wave.

The United States, in short, is well positioned for another investment boom in LNG export facilities. The commercial model is not exactly the same, as companies adjust their pitch to match a rapidly changing market. The customer base is broadening, with European companies in particular standing out for their interest. Even so, the United States and China seem to face a limit in developing a closer LNG relationship, even if various companies, on both sides, are trying to find common ground. The investment is likely to be concentrated in Texas and Louisiana, although this time around, Canada and Mexico will partake in the boom as well. Slowly but surely, the United States will continue to narrow the gap with Qatar and Australia—and quite likely, overtake them both in the 2020s.

Nikos Tsafos is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Nikos Tsafos