Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Annual Forecast. These assessments are designed to provide more context and in-depth analysis on key developments in the coming year.
The U.S. shale revolution has had a major impact at home, but its echoes have reverberated less elsewhere around the world, at least where natural gas is concerned. That, however, is about to change. By the end of 2018, the United States will launch nine liquefied natural gas export projects that will have a collective liquefaction capacity of 36.7 million tonnes per annum (mtpa). The expansion will boost the country's capacity to roughly 63 mtpa — a big step up from the mere 1.5 mtpa that existed before 2016.
It all adds up to a big year in 2019. And growth in U.S. LNG exports will continue beyond that because more processing and liquefaction facilities are expected to come online the following year. Producers are also considering additional final investment decisions to construct new facilities beyond that. The consequences of rising U.S. — as well as Australian — LNG exports have already begun to make waves throughout the market, meaning the geopolitical battle over LNG will be front and center next year, particularly among four countries: Qatar, China, Russia and the United States.
While the U.S. shale revolution has had a major impact on global oil markets, its effects on global natural gas markets have been more muted. In 2019, however, the United States will finally reap the rewards of its investments in liquefied natural gas when gas exports are expected to increase significantly and have global ramifications.
Qatar: Protecting Itself from the World
The United States and Australia are likely to be joined by others as countries around the world look for an increase in global natural gas demand in the 2020s. Last month, Royal Dutch/Shell and its partners made a final investment decision on its large LNG Canada project, which was its first such decision on a such a project in more than five years.
For years, Qatar has been the globe's LNG export leader. In 1997, the tiny Gulf state exported no LNG, but by 2011, it led the world, with an installed capacity of 77 mtpa. But in 2005, Doha implemented a moratorium on developing new parts of the North Field, the world's largest gas supply, due to concerns about oversupply and overproduction.
But increasing pressure from Australia (in parallel with U.S. growth, the country also hiked its LNG capacity by 62.3 mtpa from 2015 to 2018), the United States and elsewhere forced Doha to announce in April 2017 that it would lift that moratorium in an effort to boost its export capacity from 77 to 100 mtpa. But just two months later, three of Qatar's neighbors — Saudi Arabia, the United Arab Emirates and Bahrain — imposed an economic blockade in anger over its independent streak in foreign policy. That diplomatic course was made possible by Doha's windfall from LNG, which gave it the economic freedom to politically distance itself from its neighbors, especially Riyadh.
Since 2017, pressure from its global LNG competitors and local political rivals has prompted Doha to become more aggressive in the energy sector and enact reforms to make it more nimble. Qatar's problem has never been that its LNG exports and natural gas developments are expensive; by contrast, production is relatively easy in the North Field. But Doha must take advantage of its comparatively cheap production costs to entice international oil and gas companies to invest in Qatar instead of more expensive markets, even if the latter includes more politically stable countries such as Australia and the United States. And in order to meet its new export growth targets, Qatar must find new destinations — and the conclusion of a number of long-term LNG contracts in the first half of the 2020s will compound its task.
The U.S. emergence has also kick-started a gradual shift in Asian LNG markets, as well as a more rapid trend toward short-term contracts and gas-on-gas pricing, in which contracts are based on spot natural gas prices, instead of traditional oil prices. This has forced Qatar to explore ways to reorganize its energy sector to compete. The all-important Qatar Petroleum merged its two natural gas companies — Qatargas and RasGas — earlier this year. And after a Cabinet reshuffling on Nov. 3, Qatar Petroleum CEO Saad al-Kaabi became the country's new energy minister and will oversee some of the changes he's been pushing. At the same time, Sheikh Abdullah bin Hamad al-Thani, the brother of Emir Tamim bin Hamad al-Thani, has also become the new chair of Qatar Petroleum.
The World: Protecting Itself from Trump
One fly in the ointment for the U.S. LNG industry is the country's new trade wars. Before making final investment decisions on LNG export facilities — which can cost more than $10 billion and as much as $50 billion to $60 billion, in extreme cases — investors want a degree of certainty about long-term contract and destination opportunities. Washington's trade war with Beijing has made this more difficult, especially for LNG exporters, because China is the world's second largest LNG importer (trailing only Japan) and will be the major driver of LNG import growth over the next five to 10 years.
China imposed a 10 percent tariff on U.S. LNG in September after the United States slapped tariffs on $200 billion worth of imports on Chinese goods. And with the United States promising to levy tariffs on more goods, investors are growing skittish over how long the tariffs might remain in place; indeed, there is no guarantee that the United States and China will ever actually remove them. The uncertainty has already resulted in some delays to final investment decisions on U.S. LNG projects. On Oct. 29, LNG Ltd. announced that it would delay its decision on the Magnolia LNG export terminal in Louisiana until 2019 because of the trade spat, even though it had originally aimed to settle the matter by the end of this year. In the short term in 2019, China can easily ignore the U.S. LNG market because Russia is preparing to pump more natural gas to Asia through the new Power of Siberia pipeline. In the long term, China may need to turn to Qatar, or to more Russian natural gas, in order to avoid U.S. LNG exports.
Avoiding U.S. LNG, however, might not be so easy. As the United States embroils itself in trade wars, other countries are considering the purchase of more U.S. LNG as a means of appeasing U.S. President Donald Trump in their trade discussions. After all, given that 2019 is expected to be a bumper year for U.S. LNG, importing more of the resource from the United States offers the country's trading partners a quick, obvious and tangible way of reducing their trade surpluses. More than that, U.S. LNG represents a potential investment opportunity that could placate the United States. South Korea, Japan and even China — all countries that must import LNG — were mulling investments in the U.S. LNG industry even before experiencing pressure from the White House.
Avoiding U.S. LNG might not be easy. As the United States embroils itself in trade wars, other countries are considering purchasing more U.S. LNG as a way of appeasing President Donald Trump.
The U.S.: Protecting Europe from Russia
U.S. preparations to export large amounts of LNG will ratchet up the pressure on Russian natural gas exports — as well as Moscow's customers — in Europe. The United States views Europe's dependence on Russian natural gas as a strategic risk in Washington's global power competition with Moscow. As a result, the United States will turn up the pressure on European customers next year to purchase what it views as a politically safer alternative to Russian natural gas: American natural gas.
An abrupt switch to U.S. natural gas might not be a realistic option for many European countries, yet the Trump administration is still likely to press the argument, especially in two areas: Eastern Europe and Germany, which is Russia's largest European customer. The United States, along with Poland and other Eastern European countries, opposes the Nord Stream 2 natural gas pipeline, which is under construction. To the United States, the pipeline, along with a similar pipeline through Southern Europe called TurkStream, is a clear indication of Europe's increased reliance on Russian gas. Instead, Washington will pressure Berlin to build more LNG terminals. Amid the pressure, Germany has been playing both sides, launching construction on Nord Stream 2 earlier this year while also pledging financial support to domestic LNG import facilities.
2019 will also be crucial in the natural gas disputes surrounding Ukraine. For the United States, Nord Stream 2 will not only increase Berlin's dependence on Russian energy but also imperil Kiev, since Russia will be freer to turn off the tap to Ukraine for political reasons if there are no downstream markets in Central Europe that would otherwise suffer from a shut-off. Russia's Gazprom has argued that Nord Stream 2 makes more economic sense than rehabilitating the pipelines that traverse Ukraine due to the cost of modernizing Soviet-era pipelines. Moreover, Gazprom has noted that most of Russia's new natural gas developments are in the Arctic, which would put them closer to a pipeline in the Baltic Sea. Until this year, Germany had viewed the Nord Stream 2 pipeline in purely economic terms. Over the course of 2018, it has begun grappling with the political ramifications of the project, and Washington is certain to increase the political heat on Berlin over the project in 2019.
From competing with Russia in Europe and Qatar elsewhere to becoming a bone of contention in trade wars with China — as well as a few American allies — U.S. LNG exports are about to finally make their big splash on the global stage, more than five years after discussion first began about the impact that the U.S. resource would have on geopolitics. The U.S. shale gas revolution might have been slow in coming, but its impact might well shake the world in the year to come.