The U.S. Energy Information Administration (EIA) issued its Annual Energy Outlook 2020, where it predicts a continued rise in total dry natural gas production through 2050, primarily to support exports to overseas markets.
Since 2017, the U.S. has been a net exporter of natural gas, despite consuming more of the fuel than any other nation on the planet. It is also the world’s leading gas producers. The EIA predicts the United States will reach 94.16 billion cubic feet per day (bcfd) in domestic natural gas production this year, up from 74.1 bcf in 2015.
The Administration also projects U.S. gas consumption will fall to 85.70 bcfd in 2021 from a record 86.73 bcfd in 2020, due to the growing market share of renewables and an increasingly energy efficient economy. While past EIA projections are rarely perfect (predicting the future is a difficult business) there are no better figures currently to provide guidance for the future, including for utilities, investment community, and regulators.
The U.S. gas industry has accomplished a tremendous feat. Both liquified natural gas (LNG) exports and pipeline exports are expected to grow through 2030 despite the gas glut. Dry natural gas sales to Mexico – America’s largest export market for piped natural gas – are expected to rise moderately until 2025, after which pipeline export growth is likely to slow down. However, by 2030 Mexico will start displacing gas imported from the United States with domestic production.
Canada, America’s second largest market for gas exports, is unlikely to increase its demand for the fossil fuel, as its northern neighbor intends to transition away from conventional energy sources towards renewables in its electricity generation mix for the mid-2020s.
The slowdown in demand for U.S. natural gas among its biggest customers, coupled with increasing production, will mean a massive surplus of gas available for exports via LNG terminals.
The Trump administration has championed LNG deals in trade talks, aggressively pursuing energy agreements with countries like China, India and Ukraine. This week, President Donald J. Trump is making his first official visit to India, where LNG negotiations between the two nations took place. India is looking to receive 5 million metric tons of American LNG a year – almost one-fifth of the nation’s total annual LNG imports. Despite proving unsuccessful in the end, talks will continue in the future as conditions change.
On the other hand, China has committed to purchasing an additional $52.4 billion worth of U.S. energy supplies including LNG, per the Phase 1 trade deal. However, the 25% tariff imposed on U.S. LNG has increased its price for Chinese buyers far beyond that offered by America’s competitors in Qatar, Russia and Australia which makes the $52.4 billion figure questionable.
Farther West, there are at least two countries that are desperate replace their dependence on Russian gas with U.S. LNG – Belarus and Ukraine. Just this year Russia cut its oil and gas supply to Belarus, causing it to purchase Norwegian oil to meet domestic demand. Mike Pompeo became the first U.S. Secretary of State to visit Belarus in early February, where he pledged to supply the country with 100% of its oil and gas needs. The government of Belarus is convinced that the ongoing dispute is hardly rooted in economics only – rather, they believe, Moscow is seeking to absorb the country into the Russian Federation under the guise of “closer integration”.
Today Russia is doing everything it can to complete two major gas pipelines – Nord Stream 2 and Turk Stream – which, once completed, would allow it to bypass Ukraine and undercut the country’s role as a transit hub for Russian gas to Europe. This transit arrangement currently yields Ukraine some $2.8 billion a year in transit fees, or roughly 3% of the nation’s GDP, but may be lost when the pipelines are operational.
Ukraine is all too familiar with heavy handed Russian energy policy. Gas disputes between the two nations were especially severe in 2005-2009, while Ukraine was seeking closer integration with the EU and NATO, until an agreement was concluded in 2010 that extended the Russian lease of naval facilities in Crimea in exchange for discounted natural gas supply. Ukraine stopped importing gas from Russia completely in November 2015, though the gas it purchases from European neighbors as replacement includes Russian molecules.
American LNG is roughly twice the cost of piped gas offered by Russia ($5.00 – $600/MMBtu vs. $2.00 – $3.00/MMBtu). However, an increase in U.S. LNG exports will increase importers’ energy source diversification and security, and will lead to a boost in total volume of gas traded, thus putting downward pressure on global prices.
Ukrainian officials have called U.S. LNG deliveries through Poland to Ukraine “a win, win, win situation” for all of the countries involved. The availability of U.S. gas for Ukraine will mean a boost in leverage while negotiating with Gazprom and other providers in the future. For example, Lithuania has been able to receive a discount from the Russian monopolist since the country acquired its LNG terminal in 2014.
Undoubtedly, deliveries of U.S. LNG to countries that have relied on Russian gas for decades will provide a foundation for a regional political alliance that can act as a counterbalance the Russian influence and a counterweight against the Western European NATO skeptics.
The Three Seas Initiative – a project that seeks to facilitate interconnectivity on energy and infrastructure projects in EU member states in Central and Eastern Europe – is growing more powerful with the creation of a mutual investment fund in 2019, and recently the United States committed $1 billion to develop Central European infrastructure to the geopolitical alliance. The prospect of cooperation between Poland, Lithuania, Belarus and Ukraine will facilitate political integration in a configuration similar to that suggested by the interwar Polish leader Józef Piłsudski, the godfather of “Intermarium”.
America’s new role as an LNG export heavyweight means security of supply and a better leverage for our gas-dependent allies in Europe and around the world.
With Assistance from Bogdan Puchkov