"Falling Short: A Reality Check for Global LNG Exports"
Discussion Paper, Belfer Center for Science and International Affairs
December 19, 2014
Author: Leonardo Maugeri, Senior Fellow, Geopolitics of Energy Project
In 2012, when many energy experts argued that oil production had peaked, Leonardo Maugeri published “Oil: The Next Revolution,” which forecast a glut of oil and collapsing prices in the next several years. His prediction proved prescient. Now, as analysts look past today’s oil-market drama to a near future of robust liquefied natural gas exports, Maugeri is again challenging conventional wisdom. The long-hoped-for and hyped-up gas market, he concludes, will disappoint.
“Falling Short: A Reality Check for Global LNG Exports” details the new findings by Maugeri, a former oil industry executive who is now an associate with the Geopolitics of Energy project at Harvard Kennedy School’s Belfer Center for Science and International Affairs.
- Global gas market growth will fall short of expectations in this decade. By 2020, we will witness the largest increase of LNG global export capacity – ever. A few countries are prepared to contribute to the boom, principally the United States and Australia. However, the unprecedented growth in LNG export capacity will probably fall short of the bullish expectation of more than 200 million tons per annum (MTpa). Huge cost overruns, poor planning, changing market conditions, and emerging skinny margins or significant losses will likely kill many projects across the world, or postpone their materialization to an uncertain future. LNG trade will increase as never before, but not enough to compete with the international gas trade via pipelines.
- Cheap shale gas makes U.S. export projects cost competitive, but few will survive. The United States is uniquely positioned for an LNG export surge: the shale gas revolution will continue to supply relatively cheap gas, gas prices are de-linked from oil prices, capital costs are relatively low due to existing infrastructure, and export destinations are flexible. At a U.S. natural gas price of $4/MBtu, a number of U.S. LNG export projects could deliver gas between $10/MBtu (to Europe) and $12/MBtu (to Asia). However, once projects enter the construction phase, capacity costs will likely increase while low oil prices will decrease the international demand for U.S. LNG, making export schemes less financially feasible. No matter how many permits the U.S. Department of Energy issues, probably no more than five or six LNG export plants will materialize in the United States through 2020, totaling approximately 60-70 MTpa export capacity.
- Skyrocketing costs of Australian LNG are bad for investors, good for Asian buyers. Australian LNG is one of the worst investment cases in the oil and gas sector. Huge cost overruns have made Australian LNG ($14-16/MBtu) unprofitable at current oil prices since Australian gas is oil-indexed. Several Australian projects are already in an advanced state of completion and as they come online their capital costs will be sunk costs. Sellers will strive to cover operating costs and their gas could be competitive with U.S. LNG on the Asian market. Asian buyers could gain the upper hand in dealing with competing sellers and negotiate a pricing formula that may better suit their perceived long-term interests. Australian LNG has no outlet but the Asian markets, and it will not substantially affect the global gas market.
- Low oil prices will keep Canada out of the LNG export market for now. Canada faces several hurdles to its LNG export project development. Oil prices need to be over $100 per barrel for Canadian projects to be slightly profitable. Even before the oil price fall, not a single planned LNG export scheme reached a final investment decision due to strong opposition by local populations, especially in British Columbia, to the construction of pipelines and LNG terminals, lack of basic infrastructure, environmental issues, and a shortage of skilled workers. Combined with the fall of oil prices, it is highly improbable that Canada will contribute to the growth of global LNG export capacity by 2020.
- New global gas resources will not join the LNG export market before 2020. Huge, newly discovered natural gas resources in other parts of the world, including Mozambique, are still awaiting actual development plans and/or final investment decisions. Current market conditions will further delay their materialization, adding to the growing pressure on oil and gas companies to restore discipline to their capital expenditures. In the near term, the global gas market will be deprived of a sufficient level of liquidity, and international gas markets will retain their regional nature.
Watch Leonardo Maugeri explain the barriers to a truly global LNG market.
Download the full paper (PDF) below:
- Falling Short - LNG 2014 (2.5 MB PDF)
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