The Future of LNG: Will New Natural Gas Reserves and Advancing Technology Keep Commodity Prices Low?

The growing global supply of liquefied natural gas (LNG) made accessible by advances in drilling techniques like hydraulic fracturing and deepwater drilling has had a major impact on national and international energy markets. As such, in recent years, the United States and other countries have experienced a boom in natural gas production that has proven tough competition for conventional oil producers, putting a downward pressure on prices.

The correlation between traditional petroleum prices and LNG market prices—similar to the relationship between natural gas and coal—is now more pronounced. Crude oil prices tumbled in 2014 as the US shale revolution got underway—though shale was not the only reason for the price plummet—and conventional oil prices now remain half of what they were pre-2014. As natural gas reserves are made more accessible by new technology, are prices going to remain low? Or could the construction of capital-intensive LNG ports, long-term contracts, and a rise in global demand cause prices for domestic markets to rise, like in Australia?

Market Challenges and Opportunities

It was predicted that the fall in crude oil price would spell the end of the shale revolution, but it did not. Instead, producers reduced their costs thanks to advances in technology. For example, in its fourth-quarter and full-year results for 2016, Devon Energy said it reduced its US operating costs by 42 percent compared to peak rates. The company plans to release its 2017 results on February 20, 2018.

Growing gas reserves have prompted LNG ports to be built globally, and the US is making a major play in this market. In 2017, the US became a net exporter of natural gas for the first time since 1957, according to the EIA.

The first LNG-export terminal in the lower 48 states, Sabine Pass, opened along the Louisiana-Texas border in 2016—the first of many similar projects. In January 2018, Dominion Energy completed the construction of its Cove Point liquefaction terminal in Maryland, and the EIA expects four additional LNG terminals in Georgia, Texas, and Louisiana to be online in 2018 and 2019. These projects are expected to "increase total US liquefaction capacity to 9.6 Bcf/d by the end of 2019," reports the EIA.

LNG terminals like these, which chill and condense shale gas so it can be shipped on tankers for export, have transformed the LNG business model, and the technology is becoming more efficient.

The largest LNG export projects had previously taken 10–20 years to complete, but new US projects can start bringing the commodity to the market in about five years from inception, according to the Financial Times.

Technology has reduced natural gas prices and, in turn, cut the demand for traditional oil. However, as America and other natural gas-rich countries look to export LNG abroad for better fiscal returns, domestic LNG markets could experience a shortfall and price spike.

The Potential for Rising Domestic Prices

In this regard, Australia offers a cautionary tale. The resource-rich country is the world's second-largest exporter of LNG. This year, however, despite ample domestic reserves, southern Australia has experienced brownouts and prohibitively high energy prices. This is because most of its gas reserves are locked into export contracts, leaving domestic buyers without an affordable supply at peak demand.

In early 2017, according to the Wall Street Journal, shortages drove domestic gas prices in some eastern Australia markets to as high as $17 per million British thermal units for smaller gas users, such as manufacturers. Spot market gas prices went from below $1 in 2014 to roughly $7 in July of 2017—still well above the roughly $3 that prevails in the United States.

The Australian Premier told the Wall Street Journal that "gas export licenses were issued without regard to the consequences for the domestic [LNG] market," and, "as a result, at a time of record gas production we have had the prospect of a shortage of domestic gas on the east coast."

In contrast, the United States has thus far avoided long-term export contracts similar to those that encouraged Australian companies to give foreign buyers priority.

Future Prices

Crude oil prices remained low in 2017, though they rebounded somewhat after OPEC finally agreed to cut production. Like shale drillers, oil companies have learned to use technology to reduce production costs and be more efficient in the lower-price market.

The head of the world's biggest buyer of LNG, Japan, has warned gas producers to become even more competitive on price and allow for more flexible contracts if they want to usher in a "golden age" of gas in Asia, where prices are slightly higher than in the United States, according to the Financial Times.

At home, the US is starting to see domestic gas and crude oil prices rise slightly in the new year. The EIA reports that the average US regular gasoline retail price increased to $2.557/gal in January 2018, up $0.311/gal from one year ago. Along a similar vein, "Brent crude oil prices averaged $54/b in 2017 and are forecast to average $60/b in 2018 and $61/b in 2019," according to the EIA's January 2018 Short-Term Energy Outlook.

As a competing commodity to Saudi oil that offers lower emissions and more-flexible power generation, natural gas is a way for countries to diversify their energy supply. LNG terminals will help facilitate a global marketplace for the transportation and shipment of LNG, and improving technology will help bring terminals to market quicker and for less.

The EIA projects that US gas production will increase by 1–2 percent per year in the coming decades. Furthermore, new projects coming online over the next few years mean there will be growth in LNG exports until 2020.

Therefore, it is likely that LNG prices will only rise significantly if governments slap export restrictions on the commodity that create a shortage of supply—though the Australian government has resisted doing this so far. Prices may also rise if LNG terminals are not built at times of increased demand. Furthermore, the EIA expects 2018 and 2019 domestic natural gas prices to remain relatively flat. Thus, asset managers can reasonably anticipate the current price threshold to continue for the foreseeable future, depending on their region.