March 2021, Vol. 248, No. 3
Features
US LNG Exports: Uneven Pathway from Oilfields to Terminals
By Richard Nemec, Contributing Editor
In August of last year, between COVID-19 pandemic surges, senior executives at San Diego, Calif.-based Sempra Energy, a leading North American utility and natural gas infrastructure holding company, were dissecting the future for U.S. exports of liquefied natural gas (LNG), given 2020’s severe downturn in global energy markets.
They spoke to analysts on a quarterly earnings conference call with a basic message that the nation’s energy glass is half full. A second wave of global LNG demand is coming in the mid-part of this decade, they said.
CEO Jeffrey Martin noted that fully 80% of future energy demand would come in the developing world. The pandemic’s roughshod run over the markets is an opportunity for those able to see it and capture part of the future market, Martin told analysts.
As a result of the coronavirus, some LNG buyers delayed purchasing decisions in 2020, and several infrastructure providers have fallen behind. Sempra intends to take advantage of that gap, Martin said.
In mid-January RBN Energy Inc.’s gas analyst Housley Carr predicted growth for the midstream sector this year, citing East Daley Capital’s 2021 Midstream Guidance Outlook. After crediting East Daley’s “deep dive” into the midstream conundrum, Carr concluded, “At the end of it all, there is some good news – namely, that while it took one pandemic, two commodity-price crashes (in 2014-15 and 2020) and many years of overspending – but, midstream companies are finally laser-focused on generating free cash flow, cleaning up their balance sheets and funding growth without issuing new equity or debt.”
A midstream resurgence would be good news for future LNG exports. Sempra LNG CEO Justin Bird during last year’s conference call said, “It always comes back to what your competitive advantages are, and our approach always has been competitive, low-cost brownfield sites that can dispatch directly into the Pacific and the Atlantic. No other infrastructure provider in North America has that advantage.”
Bird said LNG supply has had an 8% growth rate, but Sempra expects it to “dramatically slow down to 1% annually … We think the supply growth will decrease as demand increases.” Sempra is targeting 2021 to move forward on the Port Arthur, Texas, LNG export project in the Houston Ship Channel. Management is talking with “many” shippers, but “there is no doubt that there has been a slowdown in the market as a result of COVID-19,” Bird said last year.
A second-phase build-out is at Sempra’s Cameron, La., LNG export facility, where Bird’s team is working with partners on conceptual work to optimize the expansion from cost basis and timing perspectives.
“We continue to see long-term growth in the LNG business, but with a very disciplined capital approach,” he said.
Amid record oil and gas production, Australia’s leading producer and supplier, respectively, reported in late January significant increased LNG sales in 2020, despite the pandemic, which cut into revenues but not volumes. Woodside Petroleum Ltd., Australia’s largest natural gas producer, reported annual LNG sales increased to 81.2 MMboe from 75.3 MMboe in 2019. Santos Ltd., the country’s largest domestic gas supplier, said LNG sales set a record at 4.3 million tons (Mt) last year compared with 2.3 Mt the previous year. More of the same is forecast for 2021 in China, Japan and South Korea.
In its 2021 Energy Outlook, the management consulting giant McKinsey & Co. noted that the CEOs of the two leading LNG suppliers talked bullishly about last year despite the now infamous pandemic that curbed global energy consumption, noting prices were rising at the start of 2021 and there were reports of an LNG price rally in the Far East, including Japan and South Korea.
“Oil and gas prices have strengthened considerably heading into the first quarter of 2021,” added Woodside CEO Peter Coleman as quoted in the McKinsey report. “We agreed to our highest ever spot LNG price for delivery in the coming quarter, surpassing our previous record set in 2012.”
Bruce Robertson, an Energy Finance analyst, Gas/LNG, for the Institute for Energy Economics and Financial Analysis, indicates in a January report the usual stability in LNG contracts is likely to dissipate this year, giving way “to a renewed period of volatility as drilling activity has been low, gas industry investment in production and development has stalled and oil and gas companies continue to experience financial instability and poor financial health around the world.”
Robertson concludes that gas buyers globally should be wary, noting that LNG projects in emerging markets increasingly are becoming “unbackable” with more volatile contract prices.
Mike Sommers, CEO at the American Petroleum Institute (API), as part of a 2021 annual oil/gas outlook, indicated he sees “common ground” with the Biden administration on trade, particularly LNG, which has global environmental advantages.
“It’s no secret that the Trump administration was not filled with much love for free and fair trade,” Sommers told a national news media audience in mid-January. “Because of our bounty of energy, the U.S. oil/gas industry wants to be able to export the ‘environmental progress’ we have made, and much of that progress is tied to the switch from coal to natural gas for power generation, while China and India continue to get most of their energy from coal.”
Sommers contends that if the United States can open the overseas market to U.S. LNG, “we’ll be able to export that same environmental progress we have made here.” API studies show natural gas is 50% cleaner than coal, he stressed. “We think this is a great opportunity on the trade side to make both environmental progress and open up other markets for American energy products,” Sommers told national news media.
He was asked if midstream can keep up with LNG export needs?
“Infrastructure is going to be a key component to America’s continued energy leadership,” Sommers said. “What we’ve witnessed is that opponents of oil and gas really work hard to shut down U.S. pipeline capacity as a way to prevent advancing these products to overseas markets.
“We’ll work with the Biden administration on this, and we expect LNG exports to continue to grow under current policy, and we think that is totally aligned with Biden’s environmental goals. Since most of the developing world’s energy still comes from coal or there is no real energy access, the best solution is American LNG.”
There is also trade deficit benefits from growing the LNG exports, he added.
Harboring concerns about the new administration in Washington, D.C., Ben Shepperd, president of the Permian Basin Petroleum Association (PBPA), reiterates that important to the success of the Permian region is “adequate transportation infrastructure of all energy, in particular natural gas pipelines, that improve the marketability of Permian Basin energy. We recognize the work being done by so many operators to expand access for the Permian fuels and PBPA broadly supports midstream companies’ investments and commitments to improving takeaway issues.”
Shepperd thinks some policies of the Biden administration jeopardize the benefits of these projects, and PBPA is closely communicating with its members to determine their potential impacts.
In January, export-related midstream infrastructure was boosted by two projects. The Permian-to-Gulf pipeline is now operable and providing what the industry considers an enormous flow and another big one, Whistler Mainline, is due to start later this year.
Those two are going to provide more substantial volumes for export. Whistler is an approximately 450-mile (668-km), 42-inch (1,067-mm) intrastate pipeline that will transport gas from an interconnect with the Waha Header near Coyanosa, Texas, in the Permian Basin to a terminus near Agua Dulce, Texas, providing direct access to South Texas markets and consumers.
Charlie Riedl, executive director of the Washington, D.C.-based Center for LNG (CLNG), deconstructed the ongoing uncertainty surrounding the Biden administration for P&GJ with a wait-and-see attitude and the same willingness to work with the Biden administration as API’s Sommers and others indicated.
“The new FERC [Federal Energy Regulatory Commission] chairman [and past commissioner] Richard Glick, has had fairly strong dissent regarding LNG projects – not because he is fundamentally against the projects, but more because he wants to limit the downstream impact of those facilities,” Riedl said. “Depending on what they decide to do on methane regulation, we’re obviously part of that, so there are things we would expect to see happen with the new administration.
Also, he said CLNG will be closely watching how the administration approaches trade – not just with China, but also Europe – as it relates to sanctions against the underwater Russia-to-Germany Nord Stream gas pipelines.
“And this applies domestically as well as globally. Domestically, how Biden is going to look at energy policy is very important to the LNG sector,” he said.
The executive order on new leases on federal lands, for example, is of concern to CLNG members.
“A lot of this is in the ‘too-early-to-tell’ phase, but the National Environmental Protection Act (NEPA) is the first thing [domestically] that comes to mind. And there are other things that could change, including the review process at FERC for LNG projects.”
What keeps Riedl up at night is the existing trade war with China. It pits the largest producer of natural gas in the world against the world’s biggest buyer of gas, he said.
“They’re locked in a trade war that has absolutely nothing to do with natural gas. Defamation of trade with China is an enormous issue for us, but we’re cautiously optimistic that the Biden administration will be able to work through it, and hopefully trade to China resumes at some point, and U.S. LNG will be ready to flow there.”
Among the oil and gas cheerleaders in this second year of the pandemic is the well-respected sage Daniel Yergin, who released an eighth book on the global industry, “The New Map: Energy, Climate, and the Clash of Nations,” in 2020. He sees the transition away from fossil fuels picking up momentum, but the relevance of oil and gas also remaining for decades to come.
Emphasizing the pre-pandemic U.S. energy world, Yergin said, “Finding export markets has created another avenue of growth. By last February [2020], the United States had hit its highest oil production level ever at 13 MMbpd, above the output of Saudi Arabia or Russia and almost tripling its level of 2008.”
No matter the current and projected trajectory for hydrocarbon development, “shale is now established as a formidable resource,” Yergin emphasized. The disruptive drilling techniques have to date not reached far beyond North America. Pre-pandemic, Argentina’s Vaca Muerta formation brought a horde of energy admirers eager to tap the vast play.
There are two other countries where unconventional drilling is “taking off,” Yergin said. “One is China, which has made some advances in shale, albeit small. And the other country, which may surprise people, is Saudi Arabia.”
While acknowledging the havoc brought to global energy markets by the pandemic, Yergin nevertheless thinks that LNG will be a growth business for some time into the future.
Lower 48 producers’ longer-term plans are for expanded export markets, and Yergin designates the U.S. as one of three global LNG powerhouses, along with Australia and Qatar. Last fall, Yergin predicted that LNG demand would grow by 2% of gross domestic product in 2021.
LNG demand is low, he admitted, but it’s no different than the downturn for other energy sources. He has reiterated that the virus impact cannot be avoided and in the near term, there may be more supply than demand.
Important to the longer-term future of LNG is the fact that knowledgeable energy scholars like Yergin appreciate concurrent developments on the horizon that could outstrip the much talked about shale revolution in North America. He recognizes the importance of a burgeoning space for carbon capture and storage (CCS), a rapidly declining cost curve for solar energy and the quickly rising interest in hydrogen. He cites the recent huge commitments to transition from fossil fuels to renewables among European majors, including BP plc, Equinor SA, Royal Dutch Shell plc and Total SE.
He thinks it’s doubtful, however, that U.S. majors ExxonMobil or Chevron Corp., nor any of the large independents, will be under as much pressure to reduce their oil and gas output.
In this same lane, the Interstate Natural Gas Association of America (INGAA) in late January announced a new set of climate change commitments that outline an INGAA mission to help address climate change, including working together as an industry toward reaching net-zero greenhouse gas (GHG) emissions from natural gas transmission and storage by 2050. Earlier that month, the INGAA Foundation released a report, North American Midstream Infrastructure – A Near Term Update Through 2025, concluding that “significant increases in exports of oil, gas [LNG and pipeline exports to Mexico] and natural gas liquids [NGL] will provide strong support for [onshore U.S.] oil and gas development.”
“Our nation’s natural gas transmission infrastructure is central to providing clean, affordable and reliable energy to all Americans,” said David Slater, Chairman of the INGAA Board and CEO at DTE Midstream. “Building on the progress the industry has already made, INGAA is committed to supporting its members in their efforts to further reduce GHG emissions and work together to address the issue of climate change.” Slater said a combination of technology advances and “sound public policy initiatives” should help meet the 2050 goal of zero emissions.
Slater and INGAA CEO Amy Andryszak indicate their gas pipeline trade organization supports strong regulations on methane emissions, but they want some of the past uncertainty surrounding the rules made clearer. “We’re looking for more certainty and predictability around regulations for methane,” Andryszak told a virtual news media conference in late January. “Any new rules need to be safe, sound and effective, avoiding unintended consequences that could impact reliability,” she noted.
Midstream projects tied to the LNG trade are driven by market forces, and FERC plays a key role in reviewing and testing those market ties, according to Slater.
“We support the regulatory process and various agency reviews,” he said. “So, as the U.S. economy recovers, we expect newer and more enhanced infrastructure.” Slater added that as an energy highway the U.S. gas pipeline network deliveries a third of all energy consumed in America.
Commissioned by INGAA’s Foundation, consultants from ICF prepared an outlook report indicating that markets will rebound as demand returns post-pandemic. Domestic natural gas use is expected to rise to an average of roughly 87.5 Bcf/d (2.48 Bcm/d) in 2025 (about 3.6% above the 2019 level). “Exports are expected to increase again as well, especially through pipelines to Mexico and LNG terminals serving world markets, prompting further infrastructure development,” ICF researchers concluded.
“The pandemic has no doubt slowed the pace of infrastructure development as demand for natural gas and oil were impacted globally, but this report shows that will change as markets rebound,” said Tony Straquadine Jr., executive director of the INGAA Foundation. “The industry is well-positioned to respond to the needs and challenges outlined in this report as domestic demand and export capacity return to the trajectory we saw entering 2020.”
The other North American energy powerhouse, Canada, keeps LNG developments somewhat separate from its base natural gas market, which has had its challenges. Chris Bloomer, president/CEO at the Canadian Energy Pipeline Association (CEPA) said he is sanguine about both sectors of the nation’s gas industry, particularly for the future growth, post-pandemic years.
While expressing a lot of disappointment on the Biden administration’s rejection of the Keystone XL oil pipeline, Bloomer prefers to emphasize a lot of opportunities and some successes already in play, such the Canadian government’s Trans Mountain oil pipeline expansion, about 800 miles (1,287 km) southwesterly from central Alberta to Burnaby, BC, and Enbridge Inc.’s Line 3, another oil pipeline, from Hardisty, Alberta, through Minnesota to Superior, Wis.
“The natural gas situation has improved with TC Energy’s NOVA NGL transmission pipeline system in Alberta, spending $1 billion to improve interconnectedness to de-bottleneck the system. There’s a lot of optimism on the gas side.”
This de-bottlenecking doesn’t have any direct impact on Canada’s LNG projects, which Bloomer notes are independent in Canada. For LNG, Bloomer said the Coastal Gas Link, the delivery system under construction for the LNG Canada export project on the West Coast of British Columbia, is moving forward. Royal Dutch Shell is leading the effort with Pacific Asian partners.
“It’s progressing and its big push will be this summer,” Bloomer said. “Despite COVID-19, it is doing quite well.”
Coastal LNG Gas Link is LNG Canada’s 500-mile (805-km) pipeline from the Dawson Creek gas supply area in British Columbia to the export terminal under construction in Kitimat, BC. In addition to Shell’s 40% ownership, the other owners are Malaysia’s Petronas (25%), China’s PetroChina (15%), Japan’s Mitsubishi (15%) and South Korea Gas Corporation (KOGAS) (5%).
CLNG’s Riedl likes the fact that globally the industry is rebounding from pandemic-driven significant demand destruction, so there is some significant rebuilding ahead. The engineering side of new projects he thinks is straightforward and well understood, but issues in the regulatory, investment and environmental sectors is where the heavy lifting will be required.
“We’ve built six projects that are now operating in the lower 48 states,” Riedl added. “We have to make sure we continue to address all these sectors in the permitting process. There really is a long lead time for these very costly endeavors.
“Moving toward more of a risk-based system, many outdated regulations need to be updated,” he said. “Being able to adapt and adopt the new technologies as they come forward is going to be critical for us as an industry,” Riedl said. Perhaps there will be some positive lessons learned for coping with a one-in-a-hundred-years’ pandemic.
Richard Nemec is P&GJ’s Los Angeles-based correspondent and regular contributor. He may be reached at rnemec@ca.rr.com.
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