US natural gas exports… boom…boom...boom!

• Natural gas production continues to rise backed by the shale revolution
• Government’s policy relaxation on exports support the industry
• LNG exports are expected to more than double in the next two years

The US natural gas industry continues to create fresh records in production backed by persistent technological advancements, which is led by the shale revolution, this mainly started around the start of the new millennium. Additionally, the US government’s focus to be energy independent nation by 2022 is driving the production momentum, while support is also being extended to allow LNG exports in different countries across the globe along with continuous rising imports from Mexico (both pipeline and LNG).

According to the data from the EIA (Energy Information Agency), the dry natural gas production clocked a CAGR increase of 4.1% during the last five years from 70.9 BCFPD (2014) to 83.2 BCFPD (2018). The production jumped by 11.4% in 2018 on a year-on-year comparison, while a strong increase in output is anticipated in 2019 as well. As the total supply is buoyed by shale gas development, the demand growth too stood healthy, though the pace of growth was lower, registering nearly 2.9% CAGR during the past five years and moving up to 81.7 BCFPD in 2018. Further, natural gas consumption in the US increased by ~10% in the last year, which was led by a very strong rise in the demand from the electricity sector, while the other sectors such as residential, commercial, industrial, etc. saw moderate growth in consumption.

While supply outpaces domestic consumption, a continued extension in the production was led by a change in the government’s stance and policies, wherein it gradually allowed exports of natural gas to different countries. Moreover, exports of natural gas were mainly limited to Canada (which does both export and import) and to an extent Mexico till very recently, however, the government started permitting LNG exports at a big scale in 2016. The gross exports have increased by leap and bounds in the past few years and doubled to ~10 BCFPD in 2018 as compared to the data from 2015. Though, the US continues to import gas through pipelines (7.8 BCFPD in 2018) with nearly all of it coming from Canada, this has more to do with the geographical advantage which some northern states in the US have on the import of gas from Canada rather than buying the same from lower southern states. Similarly, the aspect applies to the LNG imports (averaged just 0.2 BCFPD over last three years) wherein some far eastern states import part of the natural gas consumption as against buying the same from other parts of the country. Technically, it helps in getting the gas efficiently on time and at a low cost, considering the size of the US, while this also overcomes some of the policy-related barriers in place, mainly in terms of transportation of energy-related commodities within the country.

Furthermore, from a structural point of view, the US became a net exporter of gas in 2017 and the scenario as depicted from 2018 data and estimates from EIA for 2019 and 2020 are further expected to improve. According to the 2018 data, the US natural gas exports from pipeline and LNG now account for nearly 12% of the total dry natural gas production in the country. Exports are anticipated to make up around 16.5% of the total dry natural gas production by 2020, standing at ~15.2 BCFPD. Addedly, with pipeline imports too expected to moderate a bit, the net exports by 2020 are also expected to stand around 8.2 BCFPD.

For years, industry participants in the US have called for export policy relaxation on crude oil and natural gas, in order to aid the ailing producers of the commodities in the country, especially after the increase in production amid the shale boom. Particularly for natural gas while the domestic production significantly increased in the last decade, the consumption growth was largely muted and created surplus situation locally, which persistently weighed on gas prices. The US natural gas prices stand at one of the lowest levels as compared to other major markets in Europe, Asia and the Middle- East. From the government’s view, its historically tough stance against exports for the commodity was backed by the fact that allowing free trade of the commodity might incite the producers to rely on and seek more of exports, which could create imbalance towards fulfilling domestic demand, while it may also lead to a rise in prices locally.

Positively, producers are now allowed to export natural gas with an indirect condition that domestic demand should be met and surplus produced sold to external markets. This is a boon for the industry as producers can now sell part of their produce to the external consumers, wherein commanding better realizations. The country which had nearly zero LNG exports in 2015, exported 0.5 BCFPD of gas in 2016, while the same increased to 3 BCFPD in 2018. In the last year, more than 85% of the gas was exported from Louisiana (Sabine Pass Liquefaction, LLC), while around 13% was exported from Maryland ([Dominion Energy Cove Point LNG, LP], EIA data). The average realizations of LNG exports stood over $5 per MMBTU in 2018, this was way higher than the average spot price at the Henry hub benchmark in the US ($3.15 MMBTU, daily average for 2018) and further cement the case that exports are supporting the industry. Further, the total LNG exports are expected to more than double in the next two years and several other terminals are also planned/constructed in the other parts of the country. Pipeline exports to Mexico are also anticipated to extend the momentum with additional infrastructure being build/expanded to serve the energy-hungry country which is facing issues in managing gas supplies to the domestic power sector.

Hence, from a broader perspective, the natural gas exports from the US have worked as a saviour for the domestic industry since without it the surplus situation would have had continued and further pushed the local prices to a low, while severely denting producers’ operation in the long run. In addition, this strengthens the government’s plans to be energy independent in the next few years as well as places it among the major market leaders in the global energy space. Thus, going by production numbers for natural gas in 2018 and expectations in the next two years, the US already is among the top producers of natural gas and is moving to be among the top three exporters of the commodity globally. Televisory feel that the positive momentum would continue in the US natural gas industry over medium to long-term.