How U.S. LNG is Changing the Global Gas Market

U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

Andy Stone: Good day and welcome to the Energy Policy Now Podcasts from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m your host, Andy Stone. In 2016, the first cargos of liquified natural gas left the United States from a terminal on the Louisiana coast. Shipments went to energy hungry countries like China and India, but tankers full of American LNG also found their way to Kuwait and Brazil, countries that are rich and fossil fuels. And to Europe where Russia is the dominant gas supplier.

The breadth of these shipments hints at a larger impact of U.S. LNG exports. U.S. exports are helping to make the gas market more global and competitive in doing so. They have the potential to disrupt traditional buyer seller relationships and may have far reaching political consequences. Here to explore the geopolitics and natural gases today’s guest Anna Mikulska. Anna, welcome to the show.

Anna Mikulska: Thank you so much. Thank you for having me, Andy,

Stone: Anna is a Senior Fellow and Lecturer the Kleinman Center for Energy Policy and a Nonresident Fellow in Energy Studies at the Baker Institute for Public Policy at Rice University. She’s written widely on the interplay between energy markets and policy with a particular interest in the U.S. and Europe. And I guess just to get started here, Anna, you know, how do we get to the point of exporting LNG from the U.S. and how big of an opportunity are exports for us energy companies?

Mikulska: So just about a decade ago, U.S. was largely believed to be basically an emerging sink for global LNG. We were importing a lot of LNG with basically peak imports, covering 16% of U.S. demand in 2006 and the price in 2003 to 2006, of natural gas in U.S. was higher than anywhere else in the world. But often high prices are best remedy for high prices, so to speak. And the high prices of natural gas in the U.S. prompted independent oil and gas producers to see new profits were until now, there was no commercial viability.

And George Mitchell was one of those people. He was the independent wildcatter who basically proved financial viability of fracking already in 1997 and then moved to horizontal drilling to maximize exposure. And that’s basically how the energy revolution in the U.S. was born. Starting from there on the production of natural gas and also oil in the U.S. accelerated to the size that nobody predicted in the early 2000s and it’s expected to rise in the future even further.

Stone: So what is the status of exports at this point? I know there’s one export facility operated on the Gulf Coast, Sabine Pass, which is operated by Cheniere. There are other export facilities that are in the pipeline.

Mikulska: Right, but at this moment, even the Cheniere Sabine Pass is expanding with making actually its third liquefaction train operational sometime soon. Until 2020, we expect to have five different LNG export terminals operational, including some in Maryland. So we will see a growth of that. That being said today, U.S. is number one natural gas producer in the world. So that’s one thing that we need to remember, yes, most of this production goes to domestic consumption, but as of November 1st, U.S. actually is an exporter of natural gas. So we’ve moved really far from being the largest LNG importer to becoming an exporter of LNG and possibly one of the top exporters going into the future.

Stone: So it’s quite a quick and dramatic shift in that way?

Mikulska: Yes, extremely quick.

Stone: Now the global gas market as hasn’t actually really been global. This may open that market up to competition. Can you explain exactly what’s going on with the dynamics of the global gas market?

Mikulska: So until now the natural gas market has been more regional than global. And part of it relates to the fact that natural gas is a low density fuel. It’s about approximately 20% of density of oil, which means that now the transportation issue is much more difficult and much more costly. So therefore you’re trying to get your markets as close as possible. And that’s why we form markets, markets that are farther away, further away are just too expensive. That’s basically what was happening. Now with LNG becoming more and more popular and the larger part of  natural gas trade, this is changing. So we do see now a U.S. LNG in places like Spain or Kuwait or UAE, or China for that matter. And we also do see a lot of spot trading as opposed to longterm contracts, which were the basically the basis of natural gas.

Stone: So that spot market is new?

Mikulska: This is relatively new. And the increase in this spot trading is it’s definitely new and we will see movement towards that. Where we will actually, where countries will trade or companies will trade on the basis of current prices as opposed to long trade contracts that are based on oil prices because that’s how it’s been until now.

Stone: So will the U.S. be competitive in this global marketplace?

Mikulska: It will be. And part of it is that, it depends what we compare the U.S. LNG to. U.S. LNG is not going to be as cheap, especially for the European customers, as piped gas from Russia. Right. But there are other things that needs to be considered. Now when you compare the U.S. LNG to that LNG prices in Qatar, yes, the LNG breakeven price for Qatar, it’s much lower. It’s approximately half of that, of U.S., but U.S. price of natural gas production is lower than the Australian price. So we will see that but really what we need to look at is we need to look at the longterm predictions of how the trade, but also how the demand is gonna behave. Currently we are at the stage that demand is really much lower than it used to be and it’s, as we go forward, the demand is projected to increase

Stone: The demand will slow down because of efficiency? Economic slowdowns?

Mikulska: Yes. Yes. I mean yes, places that have been a major importers of natural gas, like Europe, like Japan, have their economies are not developing or not growing as fast. And same goes for China. China’s economy hasn’t been growing as much as we’ve predicted. So this impacts a lot of the global demand but the predictions going into the future are that the demand is going to pick up. We don’t know when exactly, but estimated in the mid twenties, we will see the demand picking up significantly. And you will especially coming from places like China or India and other developing countries. And that will be a part of it’s going to be economic development.

But part of it is also going to be the fact that we will those countries will try to switch to more environmentally friendly fuels including basic substituting core with cleaner natural gas. So we’ll see that demand picking up. And then this is when basically U.S. LNG will have its part, just like Australia LNG will and Qatar LNG. And even though U.S. LNG might not be as competitive as Qatar LNG, countries will want to diversify their supplies. So China is going to be very wary of getting most of its natural gas imports from one place, specifically, place that in the Middle East with concentrating how unstable Middle East has been.

So the U.S. supply or Australian supply will be considered more viable and kind of more allowing for more energy security. The same kind of idea stands behind the Europe and bringing LNG from places like U.S. or Qatar, making sure that you diversify your supply of energy and natural gas and not rely too much on one place that including or specifically now Russia for Europe and facing issues like we faced recently, like Europe has faced recently with Russian supply coming through transit for Ukraine.

Stone: So as the market becomes more global, this U.S. gas that’s available on the market, customers now have more choices of where they can get that gas.

Mikulska: Right.

Stone: I would imagine that changes some of the dynamics of their dependencies on certain suppliers as well. There’s the kind of the political component that goes along.

Mikulska: Yes, yes, it is. The political component is there, specifically when it comes to places like Russia, for example, and Eastern Europe versus Eastern Europe. Less so with but, possibly also, with Russia with relationship to Western Europe, but there is the political component that exists and that countries are considering when they’re making the decisions in terms of who they gonna be getting their energy from.

Stone: In Europe, specifically, Russia has been the dominant gas supplier, I believe between 30 and 40% of Western Europe’s gas comes from Russia, piped directly from Russia.

Mikulska: Generally Europe.

Stone: Generally Europe, okay. There have been some supply disruptions in the past, how might this additional supply from the United States at some point from Australia, as it ramps up as well, how might this change Western Europe dependency on Russian gas? Is it something that the Europeans want to get away from? What are the implications for Russia?

Mikulska: Well, Western Europe is not as, there is a concern about energy security in general, in Europe, specifically in the EU. The concern is higher in Eastern Europe than it is in the Western Europe, in the west. And part of it is because the Western Europe has been much less dependent on Russian gas than Eastern Europe is some of which and countries, some countries in Eastern Europe are basically a hundred percent dependent, or Baltic countries, are a hundred percent dependent on Russian supplies of natural gas.

So the concern is definitely larger than Eastern Europe. And with Western Europe, it’s kind of a different type of relationship. One of the signs that the concern is not as large ai the fact that we had approved North Stream 2, which will basically pipe directly natural gas from Russia to Germany through the Baltic Sea. So by doing so you basically are again going back to Russia being the dominant supplier and Eastern Europe has been actually, and Baltics countries, have been very, very critical of this.

Stone: Of the North Stream 2?

Mikulska: Yes. So they are extremely against that investment. Pointing to the fact that we, this is not what’s needed to done that we need to diversify away from Russia. Not only diversify the routes that the gas is coming from, but also the suppliers and specifically away from Russia. And therefore you do see movements to building LNG terminals in Poland or Lithuania.

Stone: Are those countries trying to get away from their reliance on Russian supply for economic reasons? Are there political or social reasons?

Mikulska: A lot of this is, I mean, economically it is cheaper to get the gas from Russia. But politically, and also in terms of energy security, it is, those countries consider this natural gas coming from Russia, not safe. So they do not want to be dependent on Russia economically and expect political pressure from Russia based on this economic dependence. So a lot of this comes from, there’s an also the fact that we did have countries have experienced shortages of natural gas because of the issues with Russia and Ukraine has been on everybody’s minds.

Stone: What exactly happened with Ukraine? There were some supply disruptions a few years ago, even more recently with Ukraine. And also there’s the issue of Russia’s annexation of Crimea. How does that play into all of this?

Mikulska: That’s exactly what the Eastern European countries have a problem with. The annexation of Crimea gave them a signal that Russia might have some other motivations to possibly towards them and possibly bringing them back into the fold under the rash independence and use the natural gas as one of those, one of the ways of doing so. And in some way, Ukraine has been dependent on Russia for natural gas. Basically Russia has been subsidizing Ukraine. Ukraine and natural gas until very recently. Ukraine has been paying very, very low price for that gas, but it is often so that this doesn’t come free.

And part of it is that Russia has expected political favors or political influence in that country. So once that influence wasn’t strong enough, or Russia didn’t believe it was going anywhere, this pilot providing very cheap gas to Ukraine, it kind of revolved, Russia was not happy with the situation and things like natural gas disruption delivery to Ukraine happened. And later with the annexation of Crimea, this has been kind of more of a political development of the situation.

Stone: Now, we mentioned a little bit earlier that there also surprisingly, at least surprising to me, there were LNG exports to, from the U.S. to countries like the United Arab Emirates and Kuwait. Why would those countries, at first look obviously are rich in natural resources, why would they be looking to get exports from the U.S.? Why is that a market?

Mikulska: So, one thing that I’ve already mentioned is that natural gas is a difficult fuel. Part of it is transportation and the prices are not very reliable. It doesn’t bring as much profits, as high of a rent, as oil does. So traditionally all producers are generally would favor oil over natural gas and that’s exactly what was happening. And this has been kind of happening in the Middle East, with the notable exception of Qatar.

Stone: Qatar being the dominant LNG export at this point?

Mikulska: Correct. So, option investors everywhere in prioritize oil. In fact, it is telling that some closed or nationalized oil sectors remain open to foreign investment in places like Saudi Arabia or Qatar or Mexico. So these are natural gas is considered not as important or for profit wise, as oil. So natural gas hasn’t been developed as much in those places. And at the same time, these countries have experienced an unprecedented population growth, which coupled with energy subsidies that exist there, resulted in shortages of natural gas that’s needed for electricity generation, right? And also for desalination of water. And all of this coupled with the fact that they’re not producing enough, made them actually have import natural gas. Now the natural way or natural producer of natural gas that they should be going to is Qatar. But there is some other issues of thorny issues or thorny history between these countries. When Gulf countries served at times demanded a discounted prices for Qatar’s natural gas based on their association. And Qatar was not willing to give those prices, having different arbitrage opportunities elsewhere. So there is a host of issues.

Stone: Even though they’re all OPEC countries working together?

Mikulska: That’s why, I mean, yeah, the reason why they actually wanted it reduced prices was on the basis of their relationship with an OPEC. Natural gas is not covered by OPEC and Qatar was not willing to forgo other arbitrage opportunities, so, and therefore we do see you know, natural gas coming from the U.S. to places like Kuwait or UAE.

Stone: Today’s guest is Kleinman Center’s Senior Fellow, Anna Mikulska. We’re talking about the geopolitical implications of U.S. natural gas exports. Moving on to the subject here of the politics of all this. So the U.S. has for a long time was, you know, an importer in oil, as well as with natural gas is now taking the role of an exporter. How does that potentially influence a U.S. relations abroad? Does it give it more or less leverage? How has it, um, changed our relationship with allies?

Mikulska: To some, well, it will change to an extent making U.S. a different partner to the Middle East. But I think one of the most important implications is that the energy security, global energy security increases as countries such as U.S., Australia, very stable countries politically are becoming some of the major exporters of energy. So the disruptions that may happen in places like Middle East, for example, like Syria or Libya, we are able to cover through U.S. exports or Australian exports of LNG. And this makes the whole global market for oil and natural gas more secure and allows us to possibly avoid issues where we have extreme spikes in specific, especially this comes just goes for oil, which is globally traded at a higher level. But we are able to avoid those huge spikes in for example, oil prices and therefore shield our economies somewhat more. Same goes for, you know, using oil as a weapon by the Middle East. This is not the case anymore because there are other sources of oil specifically that can be actually activated quite quickly. And the production can be ramped up quite quickly and not allowing other countries to basically dictate political terms globally.

Stone: These relationships, these buyer-seller relationships, particularly in the case of the U.S. some of the countries that may be customers for U.S. gas, I would imagine that maintenance of those relationships with those countries in general is going to be important to opening U.S. markets. For example, in Asia, there has been some recent conflict, you know, tension with China around Taiwan. How does this play out?

Mikulska: So this is the important things. And I think it’s very important to understand that everything is connected. So threatening Chinese imports to the U.S. with higher tariffs, we need to acknowledge that this may be faced with actually increased tariffs on U.S. imports to China, considering that one of the U.S. imports is LNG. And we hope that that LNG is going to become one of the major imports.

Stone: China is very hungry for LNG.

Mikulska: China is very hungry and it’s going to be more hungry going forward. This is going to become a problem, right, because if our LNG is taxed at a higher rate than we are not competitive to places like Qatar and Australia. And this goes again to the relationship domestically. So if you try to develop your oil and gas sector as the current administration, or that the incoming administration, is hoping for, well, this is not going help that development. So if we do not have the Asian market, particularly China, as one of our customers, this will hit back home and possibly limit the production that can happen within the U.S. and then limit the oil and gas development that the incoming administration is hoping for.

Stone: You know, Australia also, as we said earlier, developing very aggressively its own LNG supply. I’ve seen statistics that say LNG supply will increase by 50% globally by 2020 and the U.S. and Australia are going to be the bulk of that new supply.

Mikulska: Yes, 90%.

Stone: 90%– so how might we see pricing be impacted going forward?

Mikulska: Yes, by 2020 Australia is supposed to add six new LNG export terminals, U.S. around five. And the two countries will export will account for approximately 90% of more new LNG exports. Especially on the current conditions, current demand, we should have the prices being lower because just the demand is not there, but again, this is a, LNG is a long term game. So, and therefore we do see actually development of those LNG export facilities despite of their low prices globally because the producers, or the exporters, believe that this is going to change going forward.

Stone: The prices will go back up?

Mikulska: The prices will go up. So while currently, the prices might be impacted negatively because of the incoming supplies that are not matched by demand, going forward, they actually will increase. And in fact, this will also impact, most likely impact prices within the U.S., and will actually make those prices domestic prices of natural gas increase. So, but they won’t increase enough to make U.S. LNG not competitive. So it’s actually should be positive because increased natural prices also will increase natural gas production in the U.S. and then you will have more output.

Stone: In the U.S. the gas is priced on the domestic price at Henry Hub.

Mikulska: Right.

Stone: And then it’s exported based on that price. And it’s competing against gas that’s oil linked. Is that correct?

Mikulska: Well, it depends on which market. So oil, long term contracts are set up, where natural gas prices are linked to oil prices.

Stone: Even with long term contracts out of the U.S.?

Mikulska: They would be, yes, so it doesn’t have to be spot price, but a lot of this, a lot of traders now that’s going on and we’ll go onto the future will be spot based and countries will be buying and on the basis of current prices as well. But then longterm contracts are usually price based on oil prices.

Stone: You know, one more thing I wanted to ask you about is about the potential for piped gas from Russia into China. Does that change the dynamics here in any kind of way related to the market potential for U.S. gas?

Mikulska: To an extent, yes, because if the pipeline are going to be there, they are very long term investment, and they are much cheaper, the gas piped to China is going to be much cheaper. At the same time, China’s position is advantages towards Russia. So China is dictating the terms of the agreement and China is not willing, again, to be dependent to, for a majority of natural gas on one supplier, specifically Russia, which it has issues with. It has had issues where for a while. So we will still see, even if you will have that pipeline, which has now scaled back anyways, we will see other supplies of LNG coming in. But again, it’s all connected. It will all depend on the U.S. policy towards China and then its exports, right, and so on. So it’s going to be a market where both countries that are exporters will look for diversity of markets to export the markets to be safe and countries who are importers will look for diversity of imports to make sure that they also have a safe and reliable energy supply.

Stone: So in regards to the U.S. and it’s going to be sending this gas overseas. It’s customers, where have they gotten their gas to this point?

Mikulska: So there’s a couple of things with the issue. One thing is that yes, there have been supplies in Russia has been a huge supplier of natural gas, obviously in Qatar to some extent, especially more recently with LNG. But I think one thing that we need to realize that a lot of the demand that exists today is a new demand and that’s what’s going to happen going forward. So a lot of the demand that’s going to, that has existed, like in places like in Europe, it’s actually is less than it used to be. And the part of it’s because of the slowing economy and generally as countries develop, they are more energy efficient. So you will actually see less of a use of energy than they used to before just because manufacturing is leaving off in those countries, which we’ve seen in the U.S. in fact, and a service based economy steps in which is much less energy intensive.

So we see that. And on the other hand, we have all this developed world, including China and India and other developing countries, which are now stepping into the development period, which actually is very characterized by very high energy intensity. So that the markets that the suppliers of LNG are gonna be really fighting for are not the markets as much markets in Europe, or, you know, other developed countries, these are the developing countries where the suppliers will be looking at going forward and hoping that they will be able to make their mark and then to be their supplier.

Stone: So we’re going to have a world awash in natural gas, but we’re also going to have increasing demand for it. So it’s going to kind of balance each other out.

Mikulska: Right. It is, it’s been, it’s going to be in a while. We probably all have to wait until mid 2020s to see the increased demand but that’s what the predictions are for ongoing into the future, with respect to natural gas.

Stone: We’ve been talking about geopolitics and natural gas with Anna Mikulska a Senior Fellow at the Kleinman Center. Anna, thanks for appearing on Energy Policy Now.

Mikulska: Thank you for having me.

Stone: And thanks to our listeners for listening to this episode of Energy Policy Now, we hope this has shed light on one of the complex issues that impacts today’s energy sector. If you agree, please tell a friend about Energy Policy Now. To find out about the latest energy and environmental research and events from the Kleinman Center, visit our website, www.kleinmanenergy.edu.


Anna Mikulska

Senior Fellow
Anna Mikulska is an expert on European energy markets and energy policy. She is a senior fellow at the Kleinman Center and a fellow in energy studies at Rice University’s Baker Institute for Public Policy.

Andy Stone

Energy Policy Now Host and Producer
Andy Stone is producer and host of Energy Policy Now, the Kleinman Center’s podcast series. He previously worked in business planning with PJM Interconnection and was a senior energy reporter at Forbes Magazine.