Permian gas growth to underpin US LNG exports

By Peter Stewart, Interfax Chief Energy Analyst
Interfax Global Energy held a breakfast briefing with consultancy Baker & O’Brien which posed the question: Permian gas: Pulling the Rug from Under Oil-Indexed Prices. The piece below explores the growth of Permian gas and how it will impact the global LNG market.
LNG exports from the United States are often touted as a cheap alternative to oil-indexed LNG, but the reality is more complex.
Although Cheniere’s model uses the Henry Hub as a price reference, LNG sold from the company’s Sabine Pass LNG plant reaches end-users mainly through oil-indexed term contracts on a delivered ex-ship basis or on the spot market. This because of the predominance of portfolio players among those taking gas from operational US LNG plants. Portfolio players typically make a margin between the Henry Hub-related free-on-board acquisition price and the oil-indexed sale.
That has created a multi-tiered market with differentiated pricing and resulted in a switch from inflexible long-term delivered contracts to shorter-term and more-flexible pricing structures, which have abandoned clauses restricting the final destination of cargoes. Even within oil-indexed deals, flexibility can be achieved by more frequent renegotiation clauses and by the flexible use of slopes and S-curves.
If US exchange operator CME Group’s proposed physically deliverable LNG futures contract at Sabine Pass becomes a reality, it would allow even more flexible price-risk management, as derivatives such as options and swaps could be tied to the price of the futures contract.
Nowadays, the consensus is that Henry Hub gas prices will remain low relative to oil – especially if geopolitical events and upstream underinvestment cause oil prices to spike higher. ‘Permania’ in the Permian Basin looks set to continue that trend. A 600,000 barrel per day rise in Permian oil production in 2019 will prompt a sharp rise in associated gas output. Dry gas production from the basin is expected to double from 2017 levels by 2025.
Almost all of that extra gas will go to the Gulf Coast for sale as LNG, according to Robert Beck, a consultant at Houston-based Baker & O’Brien. Beck was speaking at a roundtable discussion on Tuesday hosted by Interfax and Baker & O’Brien titled: ‘Permian – Pulling the rug from oil-indexed LNG prices?’
Citing public sources including the US Energy Information Administration, Beck estimated that an additional 100 mtpa of LNG could be available from 2025 as a result of the production growth from the Permian and other US shale plays.
US LNG’s competitiveness against other supply sources will depend on how much new capacity is built around the world over the next decade.
US LNG export capacity stands at around 25 mtpa. It will rise by a further 55 mtpa by around 2021 as plants come online that are either under construction or have taken FID and been approved by the Federal Energy Regulatory Commission and the Department of Energy. However, projects amounting to 100 mtpa in additional liquefaction capacity have also been approved in the US and Canada but have yet to reach FID. And double that capacity again has been proposed but not yet permitted.
Although Shell has warned that project FIDs need to be taken to ensure adequate liquefaction capacity to meet demand, the supply glut that has until recently depressed LNG prices could be extended if demand disappoints.
Global LNG imports hit 298 mt in 2017, according to a 2018 report from gas importers group GIIGNL. If the 4% annual growth in demand projected by some majors becomes reality, it would see LNG demand hit 405 mt in 2025 and around 500 mt in 2030. With global capacity at 365 mtpa at the end of 2017, shale gas production fuelled by Permian gas would create a potential surplus by 2025 if it is all liquefied and exported as LNG.