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RBN Energy: how LG exports came to dominate US natural gas and where the market is heading.
Ten years ago, U.S. exports of natural gas in the form of LNG were a footnote in the market. But that all changed in 2016. In February of that year, the first shipment of LNG from the Lower 48 states set sail when the vessel Asia Vision departed from Cheniere Energy's Sabine Pass export terminal in Louisiana. This was the culmination of a remarkable turnaround, not only at Sabine Pass, but for the U.S. natural gas market as a whole. Eight years earlier, Sabine Pass had been completed as an import terminal, as it was projected that the U.S. would face significant shortages of natural gas supplies. Shale turned that business model on its head.
U.S. LNG exports also reshaped global trade patterns. Before U.S.-sourced cargoes hit the market, most LNG shipments were locked into destination-specific contracts, requiring delivery to a designated port. In addition, buyers were largely limited to long-term supply deals priced off crude oil through rigid formulas. The emergence of flexible, Henry Hub-linked pricing broke that mold, giving buyers new negotiating leverage and fostering a more liquid, globally interconnected LNG market.
Today’s RBN blog is the first in a multi-part series that will trace the rise of U.S. LNG exports, examine their influence on the global gas trade, and take a closer look at the quirky mechanics of LNG pricing.
History of U.S. Natural Gas Exports
U.S. pipeline exports of natural gas have been around for a long time, with small volumes moving to Canada and Mexico since the 1950s. There was nothing unusual about these cross-border pipeline flows. Growing supplies of U.S. gas in the 1960s, ’70s and ’80s were able to meet increasing demand in the two neighboring countries with some relatively modest investment in gas pipeline infrastructure. By the early 1970s, about 1 Bcf/d of U.S. gas was flowing to Mexico and Canada.
There was another source of U.S. natural gas that did not have access to the North American gas pipeline grid. That was Alaska. The development of oil production from Alaska’s North Slope in the early 1970s provided an important new source of U.S. crude oil, which also came with significant volumes of associated natural gas. But there was no pipeline network to take that gas, and miniscule local demand. However, there was an alternative disposition — a relatively new technology at the time that would super-cool the natural gas down to the point where it would liquify, reducing its volume by 1/600th (see Figure 1 below), making it possible to transport the natural gas on specially designed ships to distant markets, such as Asia.
Figure 1. Natural Gas Volume Reduction When Liquified to LNG. Source: RBN
