The Last Barrel

An “old” tradition is re-emerging in the U.S. Although exporting gas produced from American shale plays through the LNG process was initially designed as a market-finding initiative, it’s now being structured to combat economic aggression overseas. Europe has long relied on Russia for the majority of its natural gas. Russian influence over the European market enables them to dictate terms and influence economic development through supply disruption and price manipulation.

In the UK, Centrica Plc announced it is closing its Rough North Sea natural gas storage facility, and the nation plans to stop using coal-fired plants by the middle of the next decade. The UK O&G Authority estimates 78% of Britain’s natural gas will be imported by 2035, up from 50% this year. If the U.S. can offer Europe a volume-viable alternative gas resource, the Russian stranglehold on the region will be diminished.

Responsible energy policy. At a global energy summit in New York, U.S. Energy Secretary Rick Perry acknowledged that energy policy is a vital element of both domestic and foreign economic policy. In an action intended to neutralize the use of hydrocarbons as a weapon of economic war, Mr. Perry stated “We have all seen energy used as a political tool to hold countries hostage. This is an act of economic aggression that needs to be confronted. One of the most important actions we can take is to use our massive shale gas resources to begin shipping LNG overseas. We cannot allow energy to be used to cripple or harm the global economy. I can tell you that the U.S. will use our energy resources to advance energy security.” Perry concluded by saying, “We will reassure the energy security of our allies and partners around the world, acting as a force for good in an environment of uncertainty.”

Although the U.S. does not have the capability to act unilaterally, like an NOC, this “new” good neighbor policy stands in striking contrast to the self-serving assertiveness displayed by other exporting countries. The U.S. has a history of supporting our allies. Similar to Trump’s “new” policy, other U.S. Presidents also enacted plans to help when other countries needed assistance.  They were called the Marshall Plan, and the Truman Policy, et al. 

U.S. LNG shipments arrive in Europe. When the U.S. LNG export business began to emerge, Europe saw North America as a potential source for energy diversification, to decrease Russia’s leverage as the region’s dominant gas supplier. In April, the Netherlands and Poland received LNG from Cheniere’s Sabine Pass terminal. The shipment to the Dutch country was northwest Europe’s first-ever cargo of U.S. LNG, and Poland has said that the U.S.-supplied fuel is critical to diversifying its energy sources. Southern Europe has also been receiving U.S. LNG since Feb. 2016, with shipments to Italy, Malta, Spain, Portugal and Turkey. Spain and Portugal have received multiple cargoes.

Although the volumes of Cheniere’s gas exports are minuscule, compared to that delivered by the Russians through an intricate web of pipelines, a new source of supply has been established, and cargo will continue to flow to European markets, as long as LNG venders can turn a profit.  

However, since Cheniere started exporting LNG in February, only 8% has been shipped to European markets. Instead, a majority has been sent to South America, where profit margins are higher, due to elevated commodity prices and lower transportation costs. Asian markets are attractive too, and have the potential to be more profitable for U.S. LNG, if crude prices rebound, since the region’s natural gas prices are linked to local oil prices.

Korean LNG deal. Cheniere consummated a 20-year supply agreement on June 25th with Korea Gas Corp under a deal originally signed in 2012. Under terms of the contract, Cheniere will make available for delivery 3.5 million tons of fuel, annually, to South Korea, the world’s second-largest LNG buyer, which represents $548 million per year. The country’s new president, Moon Jae-in, has promised to transition away from coal and nuclear power, shifting instead to natural gas and renewables.  Moon placed a ban on building new coal-fired generation plants and shut down Korea’s oldest reactor, thus allowing LNG to play a larger role in meeting the energy demands of the country’s 51 million residents. Korea Gas CEO Lee Seung-Hoon said, “I am glad to see the beginning of a significant rise in Korean imports from the U.S. This should help ongoing disputes between our two countries on issues of trade imbalance.”

U.S. exports will stabilize world markets. After decades of relying on foreign energy supplies, the U.S. is on the brink of becoming a net exporter of oil and natural gas. Occidental Petroleum recently tested water depths at the port in Corpus Christi with the tanker Anne, to determine what upgrades would be required to accommodate larger carriers. The port, where three major pipelines unload crude from south Texas fields, has received preliminary approval from Congress for a $350-million dredging project to deepen the channel down to 52 ft to allow 1-MMbbl supertankers ingress/egress.

Cheniere, and other LNG companies, are constructing new multi-billion-dollar LNG terminals in Texas, Louisiana and Maryland, to ship more fuel abroad. The Trump administration has made approval of natural gas exports a key part of its energy strategy and will expedite the federal licensing process. The free-flow of U.S. supply also will help alleviate concerns about LNG exports from Qatar, which is under a shipping blockade because of its conflict with Saudi Arabia.    

Necessity breeds invention. We are witnessing an historic event. When the U.S. needed oil during the 1970s’ Arab Oil Embargo, our industry built an 800-mi pipeline across Alaska. Now, the world needs more natural gas, and our industry is building a pipeline across the ocean, courtesy of the red, white and blue. 

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com