The United States is poised to become one of the largest exporters of liquefied natural gas (LNG) in the next 20 years, sending out as much as 19 Bcf/d by some estimates, thanks to robust production in a post-shale era.

However, such explosive growth could put upward pressure on domestic prices and expose the previously isolated North American market to global market dynamics in the years to come, according to the U.S. Commodity Futures Trading Commission (CFTC).

Unconventional gas production, which began in earnest about a decade ago, has fundamentally altered the U.S. market, providing LNG exporters a significant competitive advantage as prices have declined significantly and have become much cheaper than oil on a per MMBtu basis, stated the CFTC report, which was issued Wednesday.

Domestic production by the end of 2017 had increased to 78 Bcf/d from 52 Bcf/d, a 34% increase from 2007. The seven U.S. unconventional producing regions contribute the bulk of current Lower 48 supply, with the Marcellus and Utica shales accounting for about one-third of onshore total dry production. Unconventional gas is projected to account for 42 Bcf/d in new supply by 2035, which is 33% of global supply growth, the report noted.

With production on the rise, prices have fallen, creating a competitive advantage for U.S. companies to export LNG to global buyers. “This business can be thought of as an arbitrage between low domestic prices and high global prices, although it is not an inexpensive opportunity to exploit,” the commission said.

Indeed, LNG developers like Tellurian Inc. are thinking outside the box when it comes to financing new projects. The Houston-based company is seeking investors for Driftwood Holdings LLC, formed to own and operate the network of gas production, LNG trading and infrastructure, which includes the proposed 27.6 million metric tons/year Driftwood LNG export facility.

Tellurian wants to raise $24 billion for Driftwood Holdings. Equity interests in Driftwood Holdings were expected to be offered at a cost of $1,500/metric ton in exchange for LNG at cost. CEO Meg Gentle indicated earlier this month that there are “more than 20 companies conducting detailed analysis in our data room for Driftwood Holdings, and we expect to be able to identify our partners soon.”

Still, the price advantage of natural gas over oil — especially with oil now at around $70/bbl — continues to be a leading enabler of LNG exports, the commission said. The share of European import contracts indexed to oil has decreased from more than 90% to less than 40% in 10 years, and newer contracts are much more likely to be indexed to natural gas. The same trend holds to a lesser degree in Asia, the CFTC noted.

However, the change toward gas-indexed pricing for LNG “may put pressure on U.S. LNG exports, because U.S. natural gas has less of a pricing advantage against other natural gas supplies than it does against oil,” the commission said. By its very nature, estimating the impact of LNG exports on domestic prices is difficult. Some analysts argue there will be no significant price change, while others estimate an impact of 5-10%, according to the report.

The biggest variable in determining the magnitude of the potential impact is the production response from domestic producers. Over time, U.S. production has become more efficient; “if this trend continues, LNG exports will have a lower impact on domestic prices,” the commission said.

Given the magnitude of U.S. exports, however, there is also the potential that domestic natural gas markets could become subject to global supply/demand dynamics with the potential for increased volatility.

While potential domestic price impact estimates vary, what is clear is that any price impact is likely to be seen in markets located near LNG export terminals and particularly on the Gulf Coast. A key reason for lower impact in market areas is that significant unconventional production is close to these areas, whereas conventional gas production is concentrated in the Gulf Coast region, the commission said.

Meanwhile, the LNG market is evolving to shorter contract durations and more spot transactions. In 2016, 29 countries (including re-exporters) exported spot volumes to 35 end-markets. This compares to six spot exporters and eight spot importers in 2000, the report said.

In addition, a lack of domestic production or pipeline imports in Japan, South Korea and Taiwan, aka JKT, has pushed these countries and others to rely on the spot market to cope with any sudden changes in demand like Japan’s Fukushima nuclear crisis in 2011. These and a host of other factors have driven a substantial increase in spot transactions that are likely to grow even more as global demand increases, the report noted.

“Overall, the shift toward shorter contracts is likely to be driven more by demand than supply. However, it may benefit U.S. LNG exports to certain markets, depending on geographic accessibility,” the commission said.

With the rise in spot transactions, the CFTC said there will likely be an increased need for derivatives markets for hedging. As gas-indexed contracts become more prevalent, and as U.S. exports increase, it is likely that trading in U.S. derivatives markets will increase as a result, especially by overseas traders.

Currently, natural gas is one of the major derivatives markets under CFTC regulation. CFTC-regulated exchanges list about 180 futures and options contracts with open interest. The reference natural gas futures contract trades on the New York Mercantile Exchange (Henry Hub) and has open interest of around 1.5 million contracts, with trading in the average range of 200,000-500,000 lots per day and a peak of more than one million lots on Jan. 12, according to the CFTC report.

Besides the reference contract, natural gas futures include financial, basis and spread contracts. These contracts together have an open interest of 18 million contracts, second only to the three-month Eurodollar as of the end of 2017.

Estimates Vary On Export Potential

There is currently 10 Bcf/d of liquefaction capacity either in operation or under construction in the United States, with both Federal Energy Regulatory Commission and the Department of Energy (DOE) having approved another 14 Bcf/d. In total, the DOE has approved export licenses for 52.9 Bcf/d, “although it is highly unlikely that this level of investment will actually occur,” the commission said.

A baseline scenario from the Energy Information Administration projects 14 Bcf/d of U.S. LNG exports in the next 20 years, with most of that growth coming in the next three to four years. BP plc, which, through its Alaska unit recently signed a long-term gas sales agreement with Alaska Gasline Development Corp. for the Alaska LNG Project, has taken a much more bullish stance, estimating that by 2035, the United States will export 19 Bcf/d. Last year’s BP Energy Outlook forecast global LNG trade would grow seven times faster than pipeline gas trade, and by 2035, BP expects LNG to account for around half of all globally traded gas.

Meanwhile, the United States will have to compete with growing exports from other countries. Leading global gas producer Qatar recently announced plans to increase LNG production by 30% by 2024, ending a moratorium that has been in place since 2005, the commission said. In addition, changes in global LNG market practices may influence U.S. exports, as could developments in the natural gas production sector. “The net result of these uncertainties is that the realized exports of LNG from the U.S. could vary widely from the estimates,” the commission said.

And while ample supply and low gas prices are at the heart of LNG export development, shipping has also seen significant developments and improvements in efficiency. Between 2012 and 2016, charter rates for advanced LNG ships have declined from more than $150,000/day to $33,500/day, the CFTC said.

Meanwhile, the global fleet of LNG tankers has expanded rapidly, with 31 new tankers added in 2016, bringing the total fleet to 478 vessels, double the number just 10 years ago.

The regasification sector has also seen improvements in efficiency with the expanding use of Floating Storage and Regasification Units. These units are cheaper and faster to build than land-based regasification units and can be re-deployed to other areas if needed. “All of these factors have helped increase global LNG trade, and this trend is likely to continue,” the commission said.

Global natural gas demand is forecast to grow at 1.6% per annum (PA) and is the only hydrocarbon with a growing share of global energy supply, according to the report. Much of this growth is fueled by economic growth in countries with insufficient energy resources and related pipeline and storage infrastructure.

“Many Asian markets rely solely on LNG for their natural gas needs. In China, growth in gas consumption (5.4% PA, 36 Bcf/day by 2035) is expected to outstrip domestic production, such that the share of imported gas in total consumption is expected to rise to nearly 40% by 2035, up from 30% in 2015,” the commission said.

Meanwhile, the push for cleaner energy and energy security concerns are also key drivers for global demand growth. One industry analysis forecasts that “global LNG trade will double over the next two decades, after increasing fourfold over the past 20 years,” the commission said.