By Jude Clemente | Forbes Magazine | March 6, 2018
And so it begins. Friday was a historic day for the U.S. energy industry and our always evolving natural gas business in particular. After a series of delays, Dominion Energy shipped out its first LNG cargo from $4 billion Cove Point export terminal in Maryland. This becomes our second LNG export facility following Cheniere Energy’s startup at Sabine Pass in Louisiana two years ago. Cove point started construction back in 2014 and liquefaction started in January.
There's no immediate word on Gemmata's destination, and officials didn't say where the ship went, but signs point to the Dragan LNG terminal in the UK as colder weather upped prices. Cove Point centers on deliveries to Europe because the journey is three days shorter than from the Gulf Coast, saving Cove Point shippers roughly $0.20 per MMBtu on transport costs. Cove Point has long-term contracts with Gail India and a joint venture involving Japan’s Sumitomo and Tokyo Gas.
The startup of Cove Point is just another piece to the U.S. LNG export boom that will continue apace. A handful of export terminals are under construction and more than a dozen are being proposed. We could become the world’s great LNG exporter in as soon as five years. LNG might be our largest incremental gas demand market: export capacity could quickly grow from nearly 4 Bcf/d now to 10 Bcf/d by 2020. LNG feed gas averaged 2.2 Bcf/d in 2017, up from 0.6 Bcf/d in 2016.
The first cargo from Cove Point marks a milestone in the northeast and a new demand outlet for Appalachia producers that now account for 35% of all U.S. gas production. Appalachia price points have remained depressed because production has soared past new demand and pipeline takeaway capacity. Cove Point is a bi-directional facility, offering both import and export capability. And the facility is designed to export 0.750 Bcf/d, but will add 0.850 Bcf/d of feed gas demand in the region, which is about a quarter of Sabine Pass' capacity.
The US could become the largest exporter of LNG in the world in the next few years.
Data source: EIA
The possibilities for U.S. LNG are massive. As the fastest growing segment in the energy business, global demand continues to defy expectations, up 11% in 2017 to nearly 40 Bcf/d. It's now widely expected that rising demand will collide with a dearth of positive final investment decisions for new export projects over the last few years to create a global LNG shortage in the early-2020s, right when the second wave of U.S. projects is scheduled to start coming online. This has given more confidence for developers that they will be able to move forward on projects later this year or in 2019. Higher LNG prices — which hit a three-year high this winter — are easing concerns about the persistent global supply glut. Banks have been waiting and can now see the oversupplied market beginning to dissipate.
LNG buyers seek more flexible, smaller volumes, and shorter-term contracts that have been the exception in the industry. Spot purchases were nearly 30% in LNG trade in 2017, up from less than 20% in 2013. Since 2008, average contract lengths have fallen from 18 years to about 7 years. But, buyers also realize that longer-term, 20-year deals are needed too in order to help export projects secure financing. U.S. LNG industry stands ready to adapt: the $3.5 billion Magnolia LNG export project has created a sample portfolio in which a customer could retain LNG supplies 40% under long-term contract, 40% mid-term, and 20% spot purchases.
Magnolia's pricing is unique too, offering LNG at Magnolia typically has offered LNG at 113% of Henry Hub prices, compared with 115% offered by some competitors. An FID on Magnolia could come by the end of this year. Headed by LNG legend Charif Souki, Tellurian wants to would sell Japanese customers LNG at a fixed $8 per MMBtu beginning in 2023, compared to the $9 seen for the country's recent pricing. That might end up being a bargain by then. And remember: the lower our prices become, the more attractive international buyers find them.