January 27, 2023
By: Qvintin Koister, Myst Energy Team
Summary
The U.S. has historically been the largest producer of Natural Gas in the world. Prior to the rise of LNG (Liquified Natural Gas), Natural Gas markets were largely regionalized as the product required shipment by pipeline. Countries like Japan, who previously had no access to natural gas, are now importing and utilizing LNG at scale. This has been facilitated by technological advances and large-scale global investment into LNG infrastructure.
The maturation of global LNG markets has been shifting the importance of natural gas in North America as LNG demand continues to grow globally. It is important to note that North American gas markets are heavily dependent upon each other which means Canada, Mexico and the U.S. may all benefit from the expansion of one another’s LNG infrastructure.
Global Gas Markets
The increase in LNG capacity has steadily outstripped growth in supply on the North American continent. Once less impactful in its infancy stages, LNG has now become a key demand driver in North America. While majority of supply growth has come out of the U.S, we continue to see an increasing penetration into North American balances, possibly forcing legacy demand markets to shift their purchase prices higher to compete with premium global gas markets.
Dutch TTF and Asian JKM monthly average prices soared 385% and 130% respectively at their 2022 peaks in August. Declining domestic supply in Europe, weak renewable energy generation, and the collapse of Russian imports due to the Ukraine conflict pushed European benchmark prices to record highs.
As a result, Europe has gone from a fringe buyer of LNG to an active procurer in the seaborne market. In turn, this has upended Asian benchmark prices to higher levels as Asian buyers have to compete at higher prices while simultaneously adding new LNG import capacities.
The U.S. industry standard pricing for export cargoes is using the Henry Hub++ formula. This pricing mechanism incorporates the price of the Henry Hub benchmark, 15% to cover the terminals operational costs and a liquification fee. While the price environment signals a need for more production, companies remain cautious due to concerns around stranded assets.
United States
Demand for natural gas from LNG processors (or "feed gas demand") was a record 11.8Bcf/day in 2022. This came even as Freeport LNG, one of the largest export terminals in the United States, has been offline since June. Freeport averages 2Bcf/day of feed gas demand.
Currently, the U.S. total export capacity is around 14bcf/day and is forecasted to grow marginally to 14.3bcf/day through 2023. While Freeport remains offline and U.S. heating demand is in full swing, feed gas intake has still been averaging 12.2Bcf/day in January as demand remains insatiable. For the full year average of 2023, we prudently estimate feed gas demand around 12.8Bcf/day.
The bullish story lays in 2024 and 2025 as multiple terminals finish construction. These projects are shown below:
Canada
Like the U.S., Canada is in a prime position to export cheap energy to the world using LNG. However, political pressure to halt LNG projects have ramped up of late and pose a risk to future investment.
Canada currently produces 18Bcf/day of dry gas and exports 5.5Bcf/day of that through pipeline into the United States. Shown on the pipeline map below, the majority of these pipeline exports travel through the Western half of the US. The vast majority of Canadian LNG capacity is set to come online in the Pacific and will be tapping the same pipelines previously mentioned.
This means that U.S. importers and Canadian LNG traders will be in direct competition for the same supply as these terminals come online. Canadian LNG exporters will place their bids for said supply in accordance with the geographical arbitrage available through Asian markets. The U.S. importer will be forced to compete for supply at an international level.
As of right now, there are about 16 proposed LNG projects in Canada with a combined liquification capacity of 30.5Bcf/day if all projects were to be approved. Although it is positive that Canada has a pipeline of potential projects, only two projects have reached the final investment stage. While Canadian LNG capacity should steadily grow, continuing to monitor final investment decisions and energy legislation will be important in 2023.
Mexico
Mexico has been a key destination for U.S. exports as gas pipelines connecting to The Agua Dulce Hub in Southeast Texas have steadily expanded throughout the years. Currently, The U.S. exports around 6Bcf/d to Mexico, accounting for roughly 70% of Mexican gas supplies.
Mexican President Manuel Lopez Obrador has plans to make Mexico an LNG hub; however, reality is that the Mexican energy industry remains hampered by an indebted PEMEX, lack of domestic pipeline capacity, and regulatory hurdles.
In 2022, Mexico produced 2.6Bcf/d with demand around 8.5bcf/d. As a net importer, demand growth moving forward will be fulfilled by U.S. producers. The result will be any labelled Mexican LNG is merely repackaged U.S. gas.
As Mexican demand is set to grow from new gas fired power plants, there has also been a rise in the LNG project pipeline. Currently, only Sempra Energy’s Energia Costa Azul LNG terminal has achieved final investment decision bringing on 0.32Bcf/d of capacity in 2024. Sempra will source the gas through its subsidiary owned Rosarito pipeline connected to Hubs in West Texas and the rocky mountain region.
As prospects look appealing, reality is Mexico will need to mature their infrastructure to become a serious gas exporter. With that said, their incremental capacity still impacts North American balances.
Conclusion
While it is important to recognize the headwinds North American LNG will face in the coming years, it is apparent that North American LNG capabilities are globalizing the once regionalized market. Current North American infrastructure and supply levels must adapt to face the needs of an evolving market.
With LNG feed gas demand growing as a percentage of North American gas supply, the more of an influence international energy and LNG prices will have on the domestic natural gas prices.
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