If you are an energy commodities analyst, the last few years have been interesting times indeed with a roller-coaster ride of lows and highs that have left natural gas prices stagnant and edging lower. North American markets are flooded with cheap and abundant gas with some Permian producers facing negative Waha prices having to flare amidst emissions hyperfocus or worse, pay to have associated gas hauled away. However, Enverus Intelligence® Research (EIR) believes that the stage is set to quickly move from stagnant to dynamic price moves in the coming year as three U.S. LNG facilities come online joined by a single mega-LNG facility in Canada.
The increase in North American LNG export capacity coincides with an important energy demand shift in southeast Asia that will certainly influence pricing in North American basins. Let’s drill into the details and explore the upside.
Energy Growth Drivers
Vietnam, Thailand, the Philippines, Malaysia and Indonesia represent the fastest growing economies in southeast Asia with 7% to 10% GDP growth over the next ten years. Supporting a long-term growth outlook is a growing population of more than 600,000,000 people in the region that is expected to add 30,000,000 working aged individuals. EIR thinks that this would position these countries to shift manufacturing out of China and Japan as their manufacturing workforce steadily dwindles.
Given the strong GDP growth and increasing manufacturing capacity, demand for electricity is likely to double, creating an appetite of energy that will be equal to the current power consumption of Canada and Mexico combined. But where will the power needed to sustain growth come from?
Regional Generation Constraints
With a sparce list of regional generation options that cannot possibly match demand, the booming Southeast Asia economies must find a reliable and sustainable energy supply, and fast. Gas production is drying up, especially in the Philippines, while new sources of supply face geopolitical headwinds as China’s influence looms large.
Located in the earthquake prone Ring of Fire, the region isn’t a good fit for nuclear power and unlikely to embrace it following the Fukushima meltdown. And while the Philippines owns a nuclear plant on the Bataan Peninsula, attempts to restart it have failed over the past fifty years.
EIR asserts that renewable energy could be a partial solution to the regional supply growth, however terrain and vegetation on the mainland and limited acreage across southeast Asia archipelagos largely rule out large-scale solar farms. Coal has always been the go-to power source for most developing countries, however, the intense focus on climate change and decarbonization create stiff headwinds to coal fired generation, leaving LNG imports the last man standing.
Sourcing LNG Globally
The good news for Vietnam, Thailand, the Philippines, Malaysia and Indonesia is that they have optionality when it comes to sourcing LNG. Qatar and Russia in the west will be constrained by travel through the Suez Canal and tense postures in the Middle East. Today, when EIR speaks about North American LNG, they’re just talking about the impending completion of new LNG trains on the Texas and Louisiana Gulf Coasts, which will open the vast reserves of the Haynesville Shale and stranded Permian associated gas to global markets.
However, there could be a potential breakout LNG player as the economics shift in Canada’s world class Montney Formation, a gas-rich shale play in northeast British Columbia and northwest Alberta. While LNG Canada is set to begin exporting Canadian LNG from the west coast in 2025, meeting the demands of the southeast Asian emerging market will take more trains than Canada currently has. Recognizing the importance of exports to the Canadian economy, the government of Alberta has made the addition of two or three more mega-LNG projects by 2030 an objective in its natural gas vision and strategy.
Indeed, EIR believes that Canadian LNG is well positioned to east Asia and emerging markets with roughly half the shipping time compared to the U.S. Gulf coast. But with many proposed projects in limbo, contracts for Montney gas may get locked up with global competitors if Canada doesn’t move faster to green light and build the envisioned LNG export capacity.
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Regasification, Storage and Geopolitics
When it comes to converting LNG to a consumable form of natural gas, regasification is not expected to be a constraint for southeast Asia’s emerging power market. Existing facilities can quickly be backstopped by offshore regasification. However, with limited storage capacity the market will be exposed to price volatility.
As with nearly every link in the energy value chain, geopolitics will also influence the success of meeting Southeast Asia demand with global LNG supply. This is evident in China’s influence in the South China Sea that discourages resource exploration as well as its imposed big brother relationship with the region.
With that said, this is an exciting time to be in commodity trading as the global LNG market begins to transform in North America over the next year.
*About Enverus Intelligence®| Research Enverus Intelligence® | Research, Inc. (EIR) is a subsidiary of Enverus that publishes energy-sector research focused on the oil, natural gas, power and renewable industries. EIR publishes reports including asset and company valuations, resource assessments, technical evaluations and macro-economic forecasts and helps make intelligent connections for energy industry participants, service companies and capital providers worldwide. EIR is registered with the U.S. Securities and Exchange Commission as a foreign investment adviser. See additional disclosures here.
