How Can The US Save Itself From The Natural Gas Glut?

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Royal Dutch Shell

Even before the world could fully recover from the oil slump that began in mid-2014 due to an oversupply of crude oil in global markets, the oil and gas industry has been struck by a new devil — an oversupply of natural gas. After taking a hit over the last 2-3 years, the US oil and gas producers have finally accelerated their oil production on the back of improving oil prices, driven by the supply cuts implemented by the Organization of Petroleum Exporting Countries (OPEC) and some Non-OPEC members earlier this year. Since natural gas is a byproduct of oil drilling, the supply of gas has also grown significantly with the surge in oil output.

Now, the global gas demand is likely to grow by 1.6% annually for the next five years, driven by the increased focus on the use of cleaner energy globally, according to International Energy Agency (IEA). Thus, one would think that there is enough appetite for the growing US gas supply. However, while there is ample demand for gas, the lack of transportation and storage facilities in the US, coupled with the stiff competition from Canadian producers in the north and west region, has created a gas glut in the country. (For further details read – How Will The Rising Natural Gas Output Impact The Ongoing Commodity Slump?)

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Being one of the cleanest and safest of all of the existing hydrocarbons, the adoption of gas, particularly Liquefied Natural Gas, or LNG, is expected to grow exponentially in the coming years. To put things in perspective, the global demand for gas is expected to increase by 2% a year between 2015 and 2030, while the demand for LNG is likely to rise at a rate of 4-5% during the same period. A majority of this growth is expected to be driven by the surge in Chinese demand for gas. As the country moves away from its coal-based economy, its gas demand is estimated to grow to 450 billion cubic meters (bcm) by 2030 compared to 200 bcm at present. This is largely because the Chinese government has set a target of increasing its gas exposure to 10-15% by 2030, from the current 5% in its energy mix.

Source: Royal Dutch Shell, LNG Outlook 2020

While this is a huge opportunity for the US, it has been unable to capitalize on it since there is only one LNG export facility, Cheniere Energy’s Sabine Pass terminal in Louisiana, that is currently operational in the country. Another terminal. to be constructed on Maryland’s Chesapeake Bay, is expected to come online soon, while three more terminals are likely to become operational not before 2019. Hence, despite having an oversupply of gas, the US is unable to leverage the exploding demand for the commodity. The major reason behind this missed opportunity is the tedious process of seeking approval for the construction of a new terminal in the US. The permit process for LNG facilities not only takes several years for clearance, but also requires approvals from multiple federal and state agencies.

Further, the US Department of Energy (DOE) post-approval revocation authority, which is the power to reconsider approvals of contracts that have already been granted, is a major concern for LNG buyers, particularly in Asia. Other obstacles, such as lower access to labor and longer time taken for transportation, have resulted in a competitive disadvantage for US compared to other LNG exporters, such as Australia, Malaysia, Qatar, and Russia. Thus, it makes sense for the US regulators to amend the existing and archaic rules to expedite the permit process. However, if the US regulators are unable to resolve the bottlenecks in the clearance of LNG projects soon enough, it is likely to push the country into another commodity downturn, which could not only hamper the financial health of oil and gas companies, but also the economic growth of the country as a whole.

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