LNG

As the US-China trade war escalates, Beijing says it has “no chance but to retaliate” new trade tariffs imposed by the Trump administration. Effective September 24, the Chinese President Xi Jinping implemented a 10% tariff on US LNG imports , casting a shadow over projected new US export terminals. China used to be the No.2 buyer of US LNG, but state-owned PetroChina already suspended buying American gas and opted to enter a 22-year purchase agreement with Qatargas. 

Spot markets are alarmed by the impact of tariffs on energy trade between the world’s two biggest economies. In the twelve months up until June 2018 China has been the second largest buyer of US LNG globally, accounting for about 3 mtpa, mostly purchased through Shell as an intermediary.

Goldman Sachs analysts warned the tariff could “effectively end direct LNG trade” between American exporters and Chinese importer, or at led to a fast drop in purchases of spot LNG cargoes.

Wood Mackenzie research director Giles Farrer, meanwhile, said short-term consequence will be less than previously indicated. “This is partly because the level of the tariff is lower than initially proposed, 10% now vs. 25% in August, but also because we think China has already completed the majority of its procurement for winter,” he said, explaining: “Possibly because of this, we have recently seen spot and futures prices for winter come down despite strengthening oil prices.”

If China still needs to procure spot cargoes, this will most likely result in a premium of up to 10% on supply from non-American, lean sources like the Australia East Coast projects, Tangguh, Gorgon or the Qatari Mega-trains. Wood Mackenzie said, suggesting Chinese buyers' appetite to pay significantly higher prices for LNG from other sources will probably be limited by the price they can sell gas domestically.

Sanctions may hamper 2nd wave of US LNG projects

Consequences will, however, be felt in the long term because the tit-for-tat policy on sanction by Beijing and Washington ultimately restricts the target markets for developers of new US LNG projects trying to sign new long-term contracts. For now, there is still plenty of appetite for second wave US LNG projects from other buyers in Asia and Europe, as evidenced by recent contracting momentum at Freeport, Calcasieu Pass and Sabine Pass Train 6.

“The first wave of US LNG projects was successful, despite not signing contracts with Chinese buyers,” Mr. Farrer pointed out. In consequence, “it could also support development of other projects outside of the US targeting the Chinese market (including Russia pipeline projects), potentially allowing them to push for higher long-term contract prices.

“The recent deal between PetroChina and Qatar is evidence of this,” he said. Qatargas, the world’s largest LNG producer, in early September stuck a 22-year sales and purchase agreement with PetroChina to deliver around 3.4 mtpa of LNG its regasification terminals at Dalian, Jiangsu, Tangshan and Shenzhen.

Pipeline gas competes with LNG on price

In August, China brought two new regas terminals in service which brought the overall number to 19 – in line with the government’s policy to replace coal with natural gas in the power sector. The two newly commissioned LNG regas terminals are situated at Zhoushan in the eastern Zhejiang province, and at Dapeng in Guangdong. The additionally contracted Qatari LNG supplies to China will come from the Qatargas II project at Ras Laffan, jointly owned by Qatar Petroleum, Exxon Mobil and Total. The emirate of Qatar currently produces 77 mpta of LNG but an expansion project is underway to bring total output to over 100 mtpa by 2024.

In addition to LNG, China also imports substantial quantities of pipeline gas from Turkmenistan, Kazakhstan and Uzbekistan, and some smaller volumes through the Myanmar-China pipeline. A further boost will come from the long-awaited start of Russian gas imports through the ‘Power of Siberia Project’, scheduled for 2019.

Demand for natural gas in China is skyrocketing after the central government implemented clean-air directives that effectively forbid the use of coal for power generation in megacities - Shanghai, Beijing, Chongqing, Guangzhou, Tianjin and Shenzhen.

‘Blue sky defense plan’ spurs gas demand

Taking bold steps to curb air pollution, China’s State Council extended the reach of the three-year 'blue sky defence' action plan in July 2018 to include cities in Shanxi, Shaanxi and Henan provinces. The target area now includes ‘2+26’ cities and prioritizes switching from coal to gas for winter heating and power generation, as well as renewables.

Accelerating air pollution now affects a region with 37% of China's population. Keen to also limit emissions, the government pushes for a shift to cleaner fuels such as LNG in the power and transport sector.

As a quick fix, inefficient coal-fired power units under 300 MW will retired and China’s State Council stipulates to replace this capacity with high efficiency, low emission (HELE) units, mostly fuelled by natural gas. Henan and Guangdong provinces, alone, have announced they will close 1 GW of coal power capacity each this year.

Before the turn of 2018/19, Germany will decide where to locate its first LNG import terminal. The German economy and energy minister Altmaier announced this move as “a gesture to our American friends” that could help ease tensions over the Nord Stream-2 pipeline project, led by Russia’s Gazprom.

Exports of natural gas from the U.S. to Mexico by pipeline exceeded 5 billion cubic feet per day (Bcf/d) for the first time in July 2018, according to Genscape data, after several key interconnectors were commissioned. By the end of 2018, anther four of six major strategic pipelines within Mexico will start up, giving further scope for export of constraint Permian production in western Texas.

Trinidad and Tobago is increasing sources of feed-gas for the Atlantic LNG plant at Point Fortin on Trinidad. To that end, the government of Trinidad and Tobago has signed an agreement with Venezuela to purchase 0.15 Bcf/d of natural gas from Venezuela’s offshore Dragon field. 

ALNG project stakeholders also identified several new domestic fields to shore up LNG production. Production and liquefaction activity has declined in recent years due to feed-gas shortages from maturing offshore fields.

Trying to stock up supplies, BP in 2017 started production from the Juniper field, which will supply 0.59 Bcf/d in feed gas and sanctioned the development of the Angelin field for 0.6 Bcf/d, where production is expected to start in 2019.

“BP has also commissioned the Trinidad onshore compression project (0.2 Bcf/d) to increase feedstock supply to the facility,” said the EIA report. “Additional offshore fields that could provide natural gas feedstock for the project were also discovered, including BHP Billiton’s LeClerc field containing 4 trillion cubic feet (Tcf) to 5 Tcf of reserves and BP’s blocks near Juniper and Cashima fields containing 2 Tcf of reserves.

ALNG has four liquefaction Trains and last year exported 10.19 million tonnes of LNG, down from 10.46 million the previous year, from combined plant capacity of 2 Bcf/d. It began LNG production in 1999 and was the first LNG facility built in the Atlantic Basin. Project stakeholders had considered adding one new Train, but were unable to identify a sufficiently large natural gas resource base to support the plan.

Most of ALNG’s exports are shipped to South America, Europe and the United States, primarily to Everett import terminal near Boston, Massachusetts, to meet seasonal winter peak demand in New England.

Global gas trade expanded last year by 63 billion cubic metres, or 6.2%, with growth in LNG outpacing growth in pipeline trading, according to the latest BP Statistical Review of World Energy. The apparent absence of a glut shows, according to analysts, that any surplus LNG resulted in bouts of unsustainably low prices rather than a build-up of idle capacity.

The global trend towards urbanization will increase business activities within some of the world fast-growing port cities, driving demand for Floating LNG power vessels. MarketsandMarkets analysis sees the FLNG power vessel market to expand from currently $860 million to nearly $932 million by 2023.

Higher relative cost to produce natural gas from the Haynesville region has led to a gradual decrease in shale gas production over the past five years. The Haynesville formation lies at a greater depth than Marcellus, so drilling costs are significantly more expensive. This caused a sharp drop in monthly dry gas production from a peak at 7.4 billion cubic feet per day (Bcf/d) in January 2012 to less than half that level by early 2016, according to EIA figures. Output rebounded since then to 6.4 Bcf/d in June 2018. 

The Haynesville formation in 2017 was the third-largest producer of shale gas after the Appalachian production region – mainly in Pennsylvania, West Virginia, and Ohio – and the Permian production region in Texas and New Mexico.

Geographically speaking, the Haynesville formation lies at depths of 10,500 feet to 13,500 feet, much deeper than the Marcellus, which is 4,000 to 8,500 feet deep. Drilling in the Haynesville shale generally more expensive than in other shale plays which makes production more dependent on the price of natural gas.

Rig count follows Henry Hub price

Higher gas prices at the U.S. benchmark Henry Hub makes it more economical for producers to spend the additional cost associated with drilling deeper to extract gas from the Haynesville formation. In 2010, when the Henry Hub price averaged $4.50 per million British thermal units (MMBtu), 223 rigs were operating in the Haynesville.
As the Henry Hub price dropped, the rig count followed, ultimately reaching a low of 20 rigs in operation in mid-2016. Since then, the Henry Hub price has increased, recently surpassing $2.00/MMBtu, and the Haynesville rig count has steadily increased to average at least 50 rigs operating in each month so far in 2018.

Well productivity keeps rising

A higher well productivity is another factor that contributed to the rise in production as the lateral length and initial production rate of each well have increased. Average lateral lengths per well have increased from 4,269 feet to 6,421 feet in the years between 2010 and 2017, according to EIA calculations, based on DrillingInfo data.

Consequently, the initial productivity rate in the Haynesville region – calculated as the initial three-month cumulative production per well – has nearly doubled from 2010 to 2017, increasing from 589 million cubic feet (MMcf) per well to 1,176 MMcf/well.

Analysts expect productivity gains will gather pace as producers optimize the gas recovery rate from the Haynesville formation.

Gross natural gas production across the United States has risen by more than 10% in recent month, spurred by new drilling and completion techniques that propelled up output from Appalachian Basin in the Northeast, the Permian Basin in western Texas and New Mexico, and the Haynesville Shale in Texas and Louisiana. The contribution of these three regions has increased from 15% to nearly 50% of total gas production.

Cheniere Energy, the leading US LNG exporter, has signed its latest supply agreement with Switzerland-based independent commodities trader Vitol. Cheniere said its marketing unit will provide 700,000 tonnes per annum for 15 years to Vitol on a free-on-board basis whereby the buyer provides the shipping.

Pieridae Energy of Canada, developer of the Goldboro LNG export project in the Atlantic coast province of Nova Scotia to supply German customers, has named Melanie Litoski as its Chief Financial Officer from the start of October. Litoski succeeds Mario Racicot who has just retired from the post.

Alfred Sorensen, CEO of Pieridae and who is himself a chartered accountant, said he would assume the responsibilities of the CFO during the interim period until September 30. “We are pleased to welcome Melanie to our leadership team. She has extensive financial, operational and strategic experience which will be instrumental in advancing the upcoming phases of our projects,” said Sorensen.