A new milestone was reached in February 2016 with the first export of Liquefied Natural Gas (LNG) from the Lower 48 states. When natural gas is cooled to -260 degrees Fahrenheit it becomes a liquid at 1/600th the volume it was as a gas. Liquefying natural gas makes transportation of the commodity much simpler via massive shipping vessels. This export capability puts the U.S. in a new position in global energy trade and will certainly impact the price of the commodity going forward. But how will this impact you and your company? (Hint: higher prices in a few years.)
LNG is not new to the U.S.; in fact, we have been importing LNG via import terminals along the Gulf Coast region since the 1970’s. With the increase in domestic production of natural gas these import terminals became ghost towns with little utilization. Now that we are literally swimming in natural gas with the rapid growth of shale production, these import terminals are being retrofitted as export terminals.
The Federal Energy Regulatory Commission requires such facilities to go through a permitting process for siting and construction. In addition to an already operational export terminal, there are four in the construction phase, one in the approved stage, and fourteen more proposed. Those in the construction phase will be operational starting in 2017 with the last completed by 2020.
Make no mistake, these LNG export terminals were built to take advantage of the robust Appalachian Basin production. The Marcellus shale region, which is located primarily in Pennsylvania and West Virginia, is the largest domestic shale producing region comprising about 37% of all the shale production in the Lower 48. The permitted daily export capacity of the four terminals being constructed along with the one that is operational will represent nearly 60% of the entire Marcellus production, wiping out a majority of the surplus. This does not even include the fifteen terminals sitting in the permitting process.
It is hard to imagine that the LNG exports, in addition to dozens of new pipeline projects underway, will not impact future energy pricing in Ohio. Certainly the producers can respond by increasing their rate of production, but this will not likely come until this new demand drives prices higher.
We currently are enjoying the lowest natural gas and electricity pricing in decades. Efficiencies in markets will remove surplus and feed shortages. This new energy paradigm is no different. The first LNG export in February was one of many to come which will likely result in greater price volatility and higher rates as these terminals become operational.