U.S. NATURAL GAS IN THE GLOBAL ECONOMY

By Sarah Ladislaw, Jane Nakano, Adam Sieminski, and Andrew Stanley 

Background

This report summarizes a one-day CSIS-International Energy Agency (IEA) workshop held in May 2017, with government, industry, and policy experts exploring the outlook for natural gas markets in the global energy landscape. The workshop addressed key issues concerning the role of natural gas in North America, as well as the evolving strategic role of U.S. natural gas exports and liquefied natural gas markets (LNG) in the global energy system. The workshop was the third in a three-part workshop series, with the first workshop examining key issues concerning the role of U.S. tight oil production in the global economy and the second workshop focusing on the societal and environmental risks associated with U.S. onshore oil and gas development. 

Executive Summary

The outlook for natural gas markets is evolving rapidly under pressure from two significant developments, the shale revolution in the United States and the advancement of LNG markets. The shale revolution, made possible by the economically viable extraction of large natural gas (and oil) deposits trapped in geologic formations, has seen natural gas production in the United States increase by nearly 50 percent over the past 10 years. The United States is producing and consuming natural gas at record levels, bringing with it an array of economic and strategic advantages in improving U.S. trade and industrial competitiveness, while altering the electric power mix and thus providing for environmental benefits.

With natural gas production growth outpacing the growth in domestic consumption, the United States is positioning to be a net exporter of natural gas on an average annual basis in 2018. The rapid growth in U.S. exports of natural gas is being made possible by the major advancements seen in the LNG industry, allowing gas to be shipped over long distances at increasingly competitive rates, thus challenging the long-established dependence on pipelines for gas trade and in turn testing traditional gas business and pricing models. Facilitated by these developments, U.S. natural gas exports are expected to more than double over the next five years making the United States one of the largest gas exporters in the world.

The growth of U.S. LNG exports will be a major force in the development of more liquid and globally integrated gas markets, supporting further opportunities for natural gas to transform electric and heating supply mixes, supplement industrial and transportation fuel mixes, improve energy security, address climate change and local pollution, provide better energy access in developing economies, and create new economic opportunities in the global economy. Gas still faces obstacles in many markets, however, and turning this new potential for more abundant and available supply into strategic opportunities is not without its challenges. A few key findings from the workshop include:

The Role of Natural Gas in North America 

In the United States, the increased availability of low-cost gas has reduced electric power emissions, but low prices for electricity brought on by an abundance of gas (along with other factors) is presenting economic pressure on other fuel sources. On the industrial side, new investments bring opportunities to regions with abundant gas resources but the supply adequacy of low-cost gas, often related to leads and lags in the investment cycle and the adequacy of midstream infrastructure to transport gas, continues to be a concern. 

While natural gas production and consumption has exhibited rapid levels of growth in the United States in recent years, the outlook going forward for further levels of growth is limited and highly dependent on prices and environmental policies. 

The rapidly increasing levels of gas exports via pipeline to Mexico and LNG exports to global markets will bring a range of strategic, economic, and security advantages to the United States; however, the magnitude of such benefits may be up for debate if domestic prices increase. 

The Role of U.S. Natural Gas in the Global Marketplace 

LNG supply is becoming increasingly flexible in terms of volume, destination, and pricing. By the early 2020s, there will likely be no single dominant supplier globally. The market is also experiencing new types of demand, such as smaller volumes and joint procurement by buyers from multiple countries. While the market today is still dominated by destination restrictions and rigid contracts, it is widely anticipated that future and renegotiated deals will be more flexible. 

In the current low oil price environment, U.S. LNG is not necessarily the cheapest potential source of supply for most markets. Once the full costs of liquefaction, shipping, and regasification have been factored in, natural gas from Qatar or Russia is generally a cheaper source of supply for Asia and Europe. However, U.S. LNG could provide a price ceiling on gas imports from other sources, while increasing supply-side options and security of supply for many markets. 

U.S. LNG over a longer time frame is seen as a major force of disruption in global gas markets. U.S. exports are free from destination restrictions and are priced off Henry Hub and so generally do not rely on oil indexation, meaning that U.S. LNG exports are challenging the traditional pricing and contract structures of global LNG markets.