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U.S. LNG Players Face Tough Task in Capturing Next Wave of Market Share, Says NextEra Analyst

U.S. liquefied natural gas (LNG) developers could face an uphill climb in efforts to capture a market share in the next wave of global demand thanks to overseas competition and unfavorable headwinds from near-term oversupply, according to NextEra Energy Resources manager of market analysis Meera Bagati.

The low-priced domestic market -- where natural gas supply is growing as electricity load growth is expected to remain flat compared to population increases -- provides a favorable dynamic for U.S. LNG players, Bagati told attendees of the LDC Gas Forums Northeast conference in Boston this week.

“If you look at the trajectory of LNG demand growth, really what we’re talking about is getting to about 10 Bcf/d by the middle of 2020” from U.S. LNG exports, she said. “By the end of 2020, we’re probably going to be the third biggest supplier behind Australia and Qatar.”

Global liquefaction capacity has roughly doubled over the last decade and should see another 66% increase over the next three to four years, mostly from the U.S. and Australia.

But the key question from here -- particularly for the next round of expansions looking to reach final investment decisions (FID) over the next two years or so -- is how much more liquefaction capacity will be needed beyond the current wave of projects under construction?

Looking out to 2030, “global perceived LNG demand” is forecast to grow by around 28 Bcf/d, according to Bagati. But look a little closer and that pie gets smaller, as some of that demand comes from nations with lower credit quality that have yet to receive LNG deliveries, she said.

“If you are a U.S. developer, you are probably not going to get your project financed if you are talking about contracts with some of these” smaller nations, putting “real LNG demand” growth, “especially if you are a U.S. developer,” at around 19-20 Bcf/d.

After factoring in potential market share that’s up for grabs from legacy contract expirations, U.S. players “are probably competing for about 25 Bcf/d of market.”

With a three to four year lead time for construction, potential U.S. LNG sellers “need to be making decisions on how to meet demand in the next two years,” Bagati said. “Obviously the bad part of that story is that the next two years are going to be oversupplied. So making decisions on buying long-term gas in an oversupplied market, the buyers and the sellers have very different expectations.”

Cheap domestic gas supplies may not be as much of a competitive advantage as one might think, she said, estimating delivered costs to Asia from U.S. projects at around $7-8/MMBtu in 2022 based on recent forward curves. Compared to renegotiated legacy oil-linked LNG contracts in a low oil price environment, “even with Henry Hub sub-$3, we’re not very competitive, so again, it’s going to be an uphill task.”

U.S. developers that can provide destination flexibility and those that can keep costs down by taking advantage of brownfield expansions will have the greatest advantages as “cost really becomes a big part of the equation in terms of who loses or who wins this next round,” according to Bagati.

Bagati pegged the U.S. share of this next wave of global LNG demand growth at anywhere from 8-20 Bcf/d by 2030 depending on how aggressively Qatar and Russia expand to capture market share.

The 20 Bcf/d scenario “is where Russia and Qatar does not go into the market as much and you have a bigger market for U.S. developers, but getting an FID the next two years is probably not going to be an easy task, just given the oversupplied nature of the market.”

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