Gas Giants Share OPEC's Shale Pain as U.S. Supply Flows East

(Bloomberg) -- OPEC isn’t the only decades-old energy hegemony being turned on its head by U.S. shale.

Liquefied natural gas sellers from Qatar to Malaysia that dominated gas sales to Asia for years are facing the prospect of rising American exports. While less than 30 U.S. cargoes have landed in Asia, their effect was felt even before they arrived. LNG trade in 2016 jumped the most in five years, contract lengths were sliced in half in the past decade, and spot prices slumped more than 60 percent in the past three years.

That means the global LNG titans gathering in Tokyo this week for Gastech are in the midst of the biggest shakeup since the industry was founded in the 1960s. Just as American crude is increasingly making its way to Asia, the world’s biggest oil market, the burgeoning armada of gas cargoes from the U.S. and elsewhere are poking holes in the financial system on which the industry’s multi-billion plants are funded.

“As U.S. exports ramp up, we’re going to see even more flexibility with more people trying to buy and trade volumes. The old models of stable long-term contracts will really have to change,” said Zhi Xin Chong, a gas analyst for Wood Mackenzie Ltd. in Singapore. “We’ve already seen the impact of U.S. LNG on contract trends, with more destination flexibility coming into play.”

Since the 1960s, when projects in Algeria and Alaska started chilling natural gas to temperatures colder than the dark side of the moon, the LNG trade was as simple as the industry’s engineering was complex. Energy companies borrowed heavily to develop gas fields and build liquefaction plants, and to pay off the debt they signed decades-long contracts with electric utilities to buy the fuel at a fraction of the price of oil.

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Now, with hydraulic fracturing lowering production costs, U.S. exporters are setting the price of LNG based on natural gas trades at Henry Hub in Louisiana. They’re also eliminating destination restrictions that require ships arrive at a specific port, which most previous contracts included, meaning traders can buy cargoes and flip them to whatever market needs them the most.

“There are more new types of players coming into the market,” Keisuke Sadamori, director of energy markets and security at the International Energy Agency said in an interview in Singapore March 28. “It’s no longer the long-term, bilateral, dedicated deal between a certain public utility and exporter but a more flexible and liquid market.”

Houston-based Cheniere Energy Inc. began exporting shale gas from the U.S. last year, and by 2020 the country could become the world’s third-largest exporter, behind Australia and Qatar, with capacity to produce 71 million tons of the fuel a year. The U.S. could pass both those countries by 2035, according to Meg Gentle, chief executive officer of prospective shale gas exporter Tellurian Inc.

U.S. plants will help boost global production capacity to 407 million tons a year by 2020, compared with projected demand of about 274 million tons, according to Bloomberg New Energy Finance.

Brent oil futures traded at $52.90 a barrel at 7:39 a.m. London time, down by more than half from early 2014. Spot LNG in Northeast Asia has fallen from nearly $20 per million British thermal units in early 2014 to $5.55, according to World Gas Intelligence. As new supplies come online, prices may drop to $3 to $4 per million British thermal units by the second half of 2018, Fereidun Fesharaki, chairman of energy consultant FGE, said in a January report.

Falling prices and ample supply have hurt traditional producers and made it more difficult for companies to launch new projects. It’s also created opportunities for LNG sellers, said Peter Coleman, managing director for Woodside Petroleum Ltd., an Australian exporter. Four countries began importing LNG in 2016, taking the total number of importers to 39, and spot trades grew to 18 percent of the entire market, according to the International Group of LNG Importers.

“Suppliers have a wonderful opportunity to create new markets,” Coleman said in a Bloomberg TV interview last week. “Not only in the conventional use of LNG, but also in new uses particularly around transportation.”

--With assistance from Abhay Singh

To contact the reporter on this story: Dan Murtaugh in Singapore at dmurtaugh@bloomberg.net.

To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Aaron Clark, Anna Kitanaka