From Gregory Brew: American LNG exports for 2016, according to the Department of Energy, totaled 109 Bcf through December, averaging about 0.3 Bcf per day. But contrary to expectations when Cheniere Energy first opened its LNG terminal at Sabine Pass, Louisiana at the start of the year, the bulk of those energy exports have not gone to markets in East Asia, passing through the newly-expanded Panama Canal, or to markets in Western Europe.
Instead, the chief recipient of American LNG has been countries south of the border. Chile received nine shipments for a total of 26.4 Bcf. Argentina was second, with six shipments totaling 16.7 Bcf. In total, four countries in South America received fifty-four percent of all American LNG in 2016, with the rest mostly going to the Middle East. By contrast, a single shipment was received by China, two were sent to Europe, and four to India.
But will the trend hold in 2017?
Mexico, undergoing major energy reforms, has seen prices stay steady as domestic supply fails to keep pace with demand. Gas imports to Mexico rose by thirty-one percent in 2016, according to Bloomberg, as deregulation encouraged new pipeline projects and closer ties to the U.S. energy industry. Brazil remains competitive, staying at or around $6 MMbtu for most of 2016. Prices in East Asia, which spiked as high as $20 MMbtu, fell during the year to the same levels as Chile and Argentina. Given their closer proximity, and the heavy competition U.S. LNG encounters from Australia and Qatar for the Asian market, Cheniere’s shipments naturally trended towards Latin American markets.
Latin America looks set to increase its demand for LNG. The enlarged Panama Canal makes exports to Chile and Ecuador cheaper and more attractive, cutting travel time to those countries by more significant margins than travel times to East Asia, according to the EIA.
As early as February 2016, analysts were caught off guard reporting that the first shipments of U.S. liquefied natural gas were destined not for Shanghai, but rather for import terminals on the Brazilian coast.
But long-term money has always been on East Asia as the prime destination for American natural gas exports. In December, Bloomberg reported that ten out of twelve LNG tankers leaving Sabine Pass were destined for East Asia. The shift is being driven by higher demand for heating gas and power plant fuel.
Prices have lurched back up since July, with the spot price jumping to $9.20 in mid-December. After a slow start, the natural gas market looks bullish in 2017, with demand closely pegged to a winter that, if sufficiently cold, could drive prices up. Natural gas futures, according to info from Bloomberg, after plummeting in 2015, rose steadily over the course of 2016 as U.S. natural gas production leveled off, albeit with frequent volatility spikes.
China has just unveiled a massive program for renewable energy as part of its next Five Year Plan. Reading between the lines, it’s clear that China’s recent overcapacity crisis will continue, encouraging it to move away from coal, yet it’s reliance on that fuel and on natural gas will continue long after 2020. But growth in natural gas output, which China boosted by thirteen percent in 2016, will make up changes in domestic demand. That doesn’t change the fact that LNG imports to China hit a record in November, rising forty-seven percent compared to 2015, in part due to colder-than-average conditions.
Even with the growth of renewables in China, which is slated to make up a third of all renewable energy growth worldwide, natural gas demand will increase and supplies from Qatar and Australia, where the huge Chevron Gorgon plant has experienced periodic shut-downs, may not be enough to fill the gap. With half of all future U.S. LNG exports already contracted by East Asian buyers, the analysts who predicted long-term East Asian demand look right on the money. That means the current trend of U.S. LNG exports to East Asia could outlast the initial rush to fill Latin American demand.
Or better yet, Cheniere’s output will be joined by cargoes from the seven other LNG export terminals currently approved for construction by the Federal Government, and will feed both growing Latin American and East Asian demand. That coupled with falling supply of U.S. natural gas could tighten the supply-demand balance and raise prices, foreshadowing a potential bonanza for natural gas suppliers and exporters, if economic trends hold. The future could be rosy for American LNG.
United States Natural Gas Fund, LP (NYSE:UNG) closed at $8.17 on Friday, down $-0.09 (-1.09%). Year-to-date, UNG has declined -12.53%, versus a +1.65% rise in the benchmark S&P 500 index during the same period.
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