North American Midstream Goes Global

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The sale of U.S. LNG is surpassing volume and earnings records this year, and there is little expectation of any near-term slowdown. Total U.S. LNG exports increased almost 11% during the first 10 months of 2022 compared to the same period last year, according to data from commodity analytics firm Kpler.

But in Europe, the volume imported from outside the continent has dramatically grown almost 150% as desperate buyers pay top dollar to replace reduced supplies from Russia.

“Looking at the latest Energy Information Administration numbers, U.S. LNG has taken over the world, and that is just going to increase,” said Clark Sackschewsky, lead for global oil and gas and U.S. national natural resources at advisory firm BDO. “North America is closer to Europe than is any other major LNG exporting region, and European demand for gas is likely to be sustained.”

While growing European LNG was sudden and large as a result of Russia’s invasion of Ukraine, a reduction of similar proportions and speed is unlikely, he said.

U.S. LNG export volumes for this year will be 12 Bcf/d and about the same for next year, said Kate Hardin, executive director of Deloitte’s Research Center for Energy and Industrials. “There are no incremental additions of note for 2023, but by 2025, [it] could be close to 20 Bcf/d and [eventually] nearly double to 28 Bcf/d, pending permitting and approvals.”

Hardin said that within that total, the average annual exports from the U.S. to Europe were 3.5 Bcf/d in 2021 and will likely be about 7.5 Bcf/d in 2022.

“Looking at the latest Energy Information Administration numbers, U.S. LNG has taken over the world, and that is just going to increase.” —Clark Sackschewsky, BDO

“It’s difficult to say what those numbers will be in 2023,” she said. “That will depend on factors such as Asian demand, especially from China, European weather and operating rates, but it likely won’t be much higher than this year.”

Russian natural gas and oil have not disappeared from the world market, they are just going to other buyers, said Sackschewsky.

The deepsea LNG market has become much more liquid, like the global crude market. That makes it unlikely that an end to hostilities in Ukraine is going to flip the switch back.

“Russian gas has not gone away, it has just gone somewhere else,” said Sackschewsky. “Even if Russia wanted to resume large sales to Western Europe, those former buyers have taken energy security to heart. They know now to do business with reliable suppliers.”

That is about as much assurance of demand as any commodity market is going to provide. Given the willingness of capital providers to fund further North American LNG export capacity, the attention falls on the midstream to get the molecules to liquefaction.

“LNG terminals take about five years to build, [although] there is a push to get at least incremental capacity into service sooner,” he said. “The questions become the regulatory environment in which brownfield and greenfield pipe can be added. We will definitely need new lines, there is only so much that midstream operators can do to increase throughput on existing pipe. Greenfield is going to have to be the way we go.”

For midstream operators that have slogged through permit applications that often last several years, a speedy turnaround would be a relief. Sackschewsky said there has been a subtle, but substantial, change in the popular and political perception of energy infrastructure.

Lessons learned about energy security

“Lessons have been learned in the last few years. There is a better understanding of energy security. Eyes have been opened in the U.S. and worldwide,” he said. “European governments have had to think about keeping houses warm in the winter for the first time in more than half a century. That has hit home.”

In short, carbon fuels have a long-term place in the economy, Sackschewsky said.

“We have to have safe and reliable ways of delivering those while we develop non-carbon energy. There is a more realistic understanding, even an expectation, that the world and even the most advanced industrial nations are going to need carbon fuels for the next several decades at least,” he said. “The midstream is the key to that.”

Hardin is sanguine that capital formation will be enough to get sufficient molecules to market.

“Investments for upstream and midstream don’t compete with each other, and the investor base is different,” she said. “Upstream projects, nowadays, are primarily funded from internal accruals, and the investor base of upstream companies is largely growth-oriented.”

On the other hand, midstream projects are 40% to 50% funded through debt.

“Their investors are primarily yield/pension-fund oriented. So, investments in the two segments complement each other. If U.S. upstream companies are cautious—being capital disciplined—it means that they are selecting only those projects where productivity/production is more economical and certain, which bodes well for midstream gathering companies,” she said.

Additionally, that cautiousness helps ensure that midstream companies don’t overbuild the infrastructure especially meant for exports.

“The stock of Cheniere Energy, the largest exporter of LNG in the U.S., for example, has increased by 50% in 2022 on rising LNG exports to Europe, despite negative profits over the past two or three years,” Hardin said.

“Investments for upstream and midstream don’t compete with each other, and the investor base is different.”—Kate Hardin, Deloitte’s Research Center for Energy and Industrials

More specifically, there are opportunities across the midstream value chain: installing or expanding gathering networks for gas-heavy basins, monetizing widening gas-to-oil/NGL price ratio, offering integrated infrastructure services to super majors, partnering in CO₂/carbon capture and storage/hydrogen projects and building export infrastructure.

Beyond the four major long-haul projects planned in the next year or two to expand transportation from the Permian Basin, Hardin said there are other important midstream efforts. Several pipeline projects are planned or under construction for the Haynesville Shale. Most of those are either gathering pipelines or will bring volumes from the Haynesville to the Gulf of Mexico for LNG export, such as Gulf Run.

But, she said, “They aren’t the large long-haul projects like in the Permian.”

Canada and Mexico are intent on joining the LNG bonanza. Commercial operations for the $2 billion, 2.5-million-mt/year Costa Azul export terminal in Baja California, Mexico, are expected in the middle of 2025. The joint venture between Sempra Energy and Infraestructura Energética Nova (IEnova) will eventually be expanded to 3.25 million metric tons per year (MMmt/year).

In the Pacific Northwest, the $32 billion LNG Canadian project at Kitimat, British Columbia, is now expected to have its first liquefaction train in operation by the end of 2027. Four trains of 6.5 MMmt/year each are planned based on Canadian gas.

Asia remains the major market

The Costa Azul project may seem counterintuitive because Mexico already imports vast volumes of U.S. gas. But Robert E. Brooks, founder and chief executive of analytics research and development firm RBAC, said the project is actually quite logical for both Mexico and for Permian producers.

“It’s a good way to ship U.S. gas directly as LNG in the Pacific,” he said. “It is a brownfield project, so there are already pipelines in place; some need to be reversed, and some compression will have to be added, but there is infrastructure.”

Brooks also said that California has stated its intention to reduce consumption of gas.

“That means that more is going to be available in the El Paso system. Long term, North American gas demand is expected to decrease, so the supply will be there for exports. Mexico has four different export projects planned for the west coast. And there is a lot of pipeline in place to get U.S. gas to them,” he said. “Given the long-term supply outlook, it is a win-win: Mexico gets U.S. investment and earns incremental revenue, while U.S. producers get direct access to Asia.”

“In three or four years, Europe may not even need Russian gas.”—Robert E. Brooks, RBAC

Expanding on that theme, Brooks said that Asia, and not Europe, remains the major LNG import market. He elaborated that U.S. LNG is making an important geopolitical and economic difference in the scrambled European energy situation, but even if Russian gas returns to Western Europe someday, the focus will return to Asia.

While Russian oil excluded from Europe is now flowing to India and China, gas pipelines in western and eastern Russia are not well connected, so the Russian gas that had been going to Europe is mostly shut in. That has led some midstream investors to fear a surge at some point, but Brooks said he does not anticipate that as a major concern.

“In three or four years, Europe may not even need Russian gas. In addition to the planned increase in LNG exports from the U.S., and entries by Canada and Mexico, there is a huge building program in Qatar, as well as several in Africa,” Brooks said. “Also, is Europe going to make the same mistake again to rely on Russian gas? Even if Russia wanted everyone just to forget Ukraine and go back to the way things were, Europe would say, ‘fool me once, shame on you; fool me twice, shame on me’.”

Brooks said that while a return of Russian gas to global markets elsewhere would cause prices to fall, in the long term the goal is for LNG to replace coal in India, China and Southeast Asia. That can only happen if gas can be landed at a price that is competitive with coal in those markets.

“It is also important to remember that a big part of the LNG picture is NGL. The ethane from wet gas and associated gas is a petrochemical feedstock, but propane and butane make LPG, and there is a huge potential market for that to replace wood, charcoal and other heavily polluting fuels for cooking and heating in developing countries. The LPG distribution system is already well established in Latin America and relies on local logistics: trucks or even scooters.  This means business and jobs for developing countries,” he said.

Regardless of the molecules, “North America will need some additional pipes,” said Brooks. “The trunk lines from the Appalachians to the Gulf Coast are at maximum capacity. We will need more. For capital providers, it is now clear that the world will need LNG for a lot longer than just the next 20 years, so the investment case remains sound. There are also opportunities in small-scale LNG for the Caribbean and archipelago countries such as Indonesia and the Philippines.”