The shale revolution in the USA has changed the face not only of that market but of global energy markets. Unprecedented – and unexpected – new production of oil and gas has driven significant new investment in energy infrastructure and businesses.
New provinces for gas production have emerged, fundamentally changing the supply and market dynamics in North America and bringing with them radical changes in prices, use of infrastructure and opportunity for participation.
Primary amongst this new investment is in LNG export projects and the associated value chain – with dozens of developers seeking to construct facilities capable of enabling cheap US gas to be sold into high value foreign markets.
Over 40 mtpa of exports have already been sanctioned by sponsors with more seemingly imminent and at least another 200 mtpa under development. Primarily utilising a tolling structure which clearly demarks risk between facility owner and customer, participants are working through the implementation challenges associated with this model: of procuring gas and lifting LNG, operating a pure tolling facility and raising finance.
The recent drop in crude oil prices creates a new dynamic for the US energy market – investment in oil and liquids development is declining as the higher end of the cost curve becomes uneconomic and developers have less cash flow to reinvest. For gas production, consensus is that there continues to be ample low cost gas to keep Henry Hub prices at the recent low levels but as ever with the US market: watch out for rapid change.
- The US gas market has already radically changed. With the advent of LNG exports, it becomes truly connected to global markets. Understanding how this linkage will work is critical.
- Massive infrastructure development means massive requirement for investment. Debt and equity has been and will continue to be raised: those investing must understand the nature and magnitude of risks (not least given the place of the US in the global context).
- The scale and pace of new LNG project development creates competition for people: in the construction phase but also in operations. People with the right commercial experience and expertise are few and far between and the tolling structure of projects will create a highly complex operating environment.
- Whilst shale gas has created a period of sustained low prices – and most forecasts project that will continue for the foreseeable future with a high volume of low cost gas still to be produced – any commodity price is subject to changes. Unanticipated price movements will have profound impacts: the wave of investment in US LNG regasification terminals prior to shale serve as an obvious reminder.
- Low global oil prices make US LNG exports look less attractive compared to oil priced supply – but for new FIDs, the fact they are not reliant on high oil-linked LNG prices to cover costs provides a competitive advantage against international projects. For now. If costs elsewhere come down, US LNG will have to fight to retain its place at the table.