America’s Move Toward Being an Energy (LNG) Exporter

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America as an exporter of energy? That doesn’t sound right, does it?

The country’s large demand for energy has made it an energy importer despite being the world’s top producer, having just surpassed Russia and Saudi Arabia this year. Due largely to the production of natural gas from shale, the US has the potential to consistently be a net exporter of energy for the first time since 1949 thanks to Liquefied Natural Gas (LNG). Many questions are being asked such as: What is LNG? What is LNG’s role in the broader U.S. energy picture? What is LNG’s role in the global natural gas market? This post will focus on those answers, as well as take a look at the current projects underway in the U.S.

What Is LNG?

LNG is natural gas that has been cooled to -260 degrees Fahrenheit until it becomes a liquid. The cooling process is known as Liquefaction, while the corresponding process to return LNG to its gaseous state is known as Regasification. The volumetric equivalent is reduced by approximately 600 to 1 allowing for transport across large distances on ocean tankers. It is this last characteristic of LNG that presents a huge opportunity for the U.S. given the current global natural gas market and the large increase in U.S. supply. LNG serves several purposes in the natural gas market:

1) It can be imported or exported using tanker ships,
2) It is used for domestic storage and
3) It can also be used as a vehicle fuel.

What Is LNG’s Role in the Broader U.S. Energy Picture?

Prior to 2007, U.S. LNG imports were increasing as the country strove to meet its increasing natural gas demand. This happening during a time when domestic production was flat and several new import facilities were opened between 2005 and 2010. However, since the proliferation of drilling natural gas from shale has resulted in a well-supplied market, the level of LNG imports has decreased dramatically thereby drumming up potential for exports.

It is worth noting that the Northeast U.S. natural gas market will remain dependent on LNG imports to meet their demand. Currently, there is insufficient pipeline capacity, or other methods of transport, to deliver shale gas to the New England region. 

What is LNG’s Role in the Global Natural Gas Market?

Where will the exports go?  Western Europe and Asia don’t have the same access to natural gas reserves as the US and as a result, the price of gas in these countries can be two to three times higher than the U.S. cost. This price disparity is especially evident in Japan where they experienced $14/MMBtu prices at the end of 2012. Also, following the Fukushima tragedy, Japan shut down all of their nuclear power plants and is relying primarily on natural gas to fuel electricity generation. European nations are heavily reliant on costly pipeline supplies from Russian to meet winter demand.

There is a lively debate in the US whether LNG exports should be allowed. Exports benefit the energy industry and create jobs, but there is risk that gas prices will rise and the domestic industry will lose its advantage of low cost energy. It’s difficult to predict the result of this debate. The debate is not slowing down developers of LNG export terminals. More than 30 terminals have been proposed, but only four have received approval to export to non-FTA (Free Trade Agreement) nations giving access to key European and Asian markets. And only one plant is under construction by Cheniere Energy at Sabine Pass, LA. It is highly unlikely that all the sites will be built due to:

1) Huge capital development costs to build terminals,
2) Eventual international shale gas development that will limit the duration of opportunities and
3) Price impact of exports if the market is flooded with supply with prices being higher in the US and lower abroad.

If built, these export terminals will allow for gas to be liquefied and shipped abroad for a substantially higher price. The four sites approved thus far have the capability to export approximately 6 Bcf/day in or around 2017, but that date is also uncertain.

What’s the Bottom Line?

The bottom line is that LNG exports are likely to occur, although not for a few years. And due to shale gas and new technologies, the U.S. has a tremendous opportunity to turn a once bleak energy scenario into a very profitable one. It will be very interesting to watch how the U.S.’ move to export LNG plays out.

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