US shale gas shaking up global markets as LNG trading surges

[NEW YORK] Shale drillers from Pennsylvania to Texas flooded the US with so much natural gas over the past decade that prices slid to a 17-year low. Now they're going global, with the potential to upset markets from London to Tokyo.

The US began shale gas exports by sea this year and is projected by the International Energy Agency to become the world's third-largest liquefied natural gas supplier in five years. Gas will challenge coal at European power plants and become affordable in emerging markets, where prices have been high and supplies limited, according to the IEA and Goldman Sachs Group Inc.

LNG became the world's second most traded commodity after oil last year and demand will keep growing, Goldman said. US gas is adding to the global glut triggered by new Australian supply and weakening Asian consumption. Shale is having an outsized impact on how LNG is sold, prompting spot trading in lieu of long-term contracts.

"The US clearly changed the picture," Costanza Jacazio, a senior gas analyst with the Paris-based IEA, said in a phone interview. "It's going basically from zero to the third-largest LNG capacity holder in the space of five years and it brings a new flexible dimension to the LNG market."

With supplies growing, some Asian nations like Japan are contracted to buy more than they can consume, leaving surpluses to be sold. That's lured major traders into the LNG market in recent years, including Vitol Group, Trafigura Group, Koch Industries Inc, Gunvor Group Ltd and Noble Group, the IEA said.

The annual capacity of liquefaction plants, where gas is chilled and compressed for shipping, grew to 415 billion cubic metres in 2015 and will expand to 595 billion by 2021, according to the energy agency.

Cheniere Energy Inc has sent 19 tankers of the liquefied gas abroad from its Sabine Pass terminal in Louisiana. By 2020, five terminals will be operating on the US Gulf Coast and in Maryland. Global export capacity will surge 45 per cent and the US's share will jump to 14 per cent from nothing, according to Energy Aspects Ltd.

While US supply is still relatively small, it's having an impact because the American contracts are flexible. Australian and other foreign processors conclude long-term agreements to send gas to specific countries such as Japan and China.

Asian buyers have contracted for more than half of the US supply, but they have the freedom to ship the fuel to anywhere in the world, encouraging spot trading.

The change will weigh on already low global LNG prices. The WGI Northeast Asia spot LNG price has averaged just US$5 per million British thermal units this year, a premium of US$2.86 over benchmark US prices. Two years ago, the gap was about US$11. The premium for UK futures to the US narrowed by about half to US$2.

The widening of the Panama Canal is going to have an impact as well. It's now able to handle most of the world's LNG tankers and will reduce time and costs for US cargoes to destinations such as Chile and Japan.

This week, Maran Gas Apollonia became the first LNG tanker to pass through the newly enlarged Panama Canal after picking up a cargo at Cheniere's terminal in Louisiana.

It's carrying the shale gas to the Far East, according to an official at Maran Gas Maritime Inc. By 2021, the US may dispatch as many as 550 tankers a year through the waterway, the US Energy Information Administration forecasts.

Most of Cheniere's cargoes so far have gone to South America buyers in Brazil, Argentina and Chile. Costs to ship to Chile will plunge with the canal expansion, the EIA said.

Shale gas created intense competition between coal and gas in the US, and now US LNG may fuel European gas plants that are operating at about 20 per cent of capacity on average, Christian LeLong, a New York-based analyst with Goldman, said in a phone interview.

Last year, LNG trade reached about US$120 billion, making it the second-largest commodity traded globally, surpassing iron ore, he said.

Egypt, Jordan, Pakistan and Poland all became LNG importers last year for the first time. Indonesia's Arun terminal, which started producing LNG in 1977, has been converted for imports, according to the IEA.

In emerging markets, smaller and cheaper floating import vessels have become popular. They cost US$200 million to US$300 million compared with US$1 billion or more for larger onshore plants. Egypt got its first two floating units last year and has been operating them at maximum capacity, said Jason Feer, head of business intelligence with ship brokerage Poten & Partners in Houston. There are 19 operating worldwide, with plans for as many as 15 more, he said.

"There are markets like Bangladesh and Pakistan where traditionally they would have gone with coal but now gas can be the cheaper option once you include the cost of new infrastructure," Mr LeLong of Goldman said. "You are seeing these energy poor countries often with poor credit ratings turning to LNG."

BLOOMBERG