In this week’s energy industry analysis, we take a look at the anticipated growth of U.S. liquefied natural gas production, the impact of the British Columbia floods on pipeline operations in Canada, and fears of a natural gas supply disruption in Europe.
Growth expected for US LNG exports
After trailing in third place since 2020, the United States is expected to pull ahead of Australia and Qatar and take the lead as the world’s largest liquified natural gas exporter in 2022, according to the U.S. Energy Information Administration.
The expected increase in U.S. LNG capacity is largely due to the completion of two facility projects—the enhanced production capacity of Cheniere’s Sabine Pass LNG export facility and the completion of Venture Global’s Calcasieu Pass LNG facility, both in Louisiana.
The completion of the sixth liquefaction train at Sabine pass is expected to add .76 billion cubic feet per day of peak capacity, with a goal to be operational by the end of 2021. The new 18-train Calcasieu Pass facility has a peak capacity of 1.6 Bcf/d and is expected to be operational by the end of 2022. These projects, among others, are expected to push the U.S. peak LNG capacity to 13.9 Bcf/d, exceeding that of Australia and Qatar, which have peak capacities of 11.4 Bcf/d and 10.4 Bcf/d, respectively, according to the EIA.
An important milestone in achieving this export increase was the U.S. Federal Energy Regulatory Commission’s approval earlier this year. This approval allowed the facilities to continue with plans to optimize and enhance operations and set a positive precedent for other potential expansions.
The LNG export market and related capacity is important not only to the United States, but globally, as LNG plays a major role in meeting energy demand needs worldwide. Limiting U.S. LNG exports could threaten both market stabilization and clean energy goals. While many parts of the world are emerging from or still experiencing energy shortages, the availability of natural gas—a cleaner alternative to coal—is imperative both to the overall economy and the environment.
“The U.S. natural gas price is currently at an unprecedented discount compared to Europe and Asia, where spot LNG prices have been trading above $25 and $30 per MMbtu, respectively,” according to IHS Markit. An increase in U.S. capacity and export ability is expected to help stabilize the market globally, and further decrease prices domestically as it supports continued investment in supply.
Canadian pipeline operations in the wake of floods
The Trans Mountain pipeline’s chief operating officer announced this week that the Canadian pipeline isn’t expected to return to operating at full capacity until late January at the earliest, after it was shut down as a precautionary measure on Nov. 14 due to devastating floods in southern British Columbia. As the only pipeline system supplying oil from Alberta to Canada’s west coast, the aftermath of the floods on fuel supply highlighted the fragile balance between fighting climate change and ensuring energy security as the energy transition accelerates.
Trans Mountain transports approximately 300,000 barrels of oil per day from Edmonton to Burnaby and supplies 90% of the fuel needed in the Lower Mainland, as well as approximately one third of the volume to refineries in Washington state. It was shut down for 21 days, the longest period in the 68-year history of the pipeline, and is currently running at 75% capacity after restarting on Dec. 5.
After catastrophic heavy rain hit parts of British Columbia in November and destroyed roads, bridges, and homes, the decision was made to shut down the pipeline to assess potential damages. Trans Mountain estimates that direct costs of the shutdown are in the tens of millions of dollars. With approximately six million barrels of oil not shipping over that period, the provincial government implemented a gasoline rationing order limiting drivers of non-essential vehicles to 30 liters per fill-up, which was lifted on Dec. 14.
Burnaby’s Parkland refinery processes up to 55,000 barrels of crude per day into gasoline and paused operations on Nov. 23 due to a lack of supply from Trans Mountain. It’s estimated that its storage tank capacity of 1.6 million barrels was near empty prior to the restart of Trans Mountain.
The flooding and other climate disasters in British Columbia this year were “supercharged by human-caused climate change,” The Washington Post reported in November. As we move into 2022, companies will need to assess how to balance reducing greenhouse gas emissions with global energy security needs. This was also recently highlighted by U.S. President Joe Biden’s efforts to increase oil supply in the country and lower gasoline prices to support economic recovery, and the natural gas shortage in Europe and Asia.
Lack of access to motor fuels will not only hamper economic recovery from the pandemic, but will also disrupt supply chains and the ability of Canada’s current economy to function. As the infrastructure to replace motor fuels with renewable energy is still several years or decades away, the least overall destructive method to combat climate change is to invest in emission-reducing technologies for fossil fuel production, such as carbon capture.
Geopolitical tensions and Europe’s natural gas supply
Much of Europe is dependent upon Russia for natural gas, and fears of a supply disruption amid the military buildup along the Russia/Ukraine border have intensified this week’s price run up, which was initially driven by cold weather forecasts.
Russia supplies approximately 40% of Europe’s natural gas imports. Existing gas supplies from Russia reach Europe via a pipeline through Ukraine, which is often at risk due to the Russia and Ukraine conflict.
The longstanding tensions between Ukraine and Russia related to the Crimea region have escalated as Russia has amassed a reported 100,000 troops at the border. President Biden has threatened economic sanctions if Russia escalates the conflict.
Alongside the European gas shortages and Crimean conflict is the issue of the Nord Stream 2 pipeline, a pipeline built by Russia-owned Gazprom, which could bypass existing natural gas flows in the region. Governments, producers, consumers, and market participants are sharply divided on whether the recently built pipeline should be placed in service to diversify supply routes to Europe.
European gas supplies are down and at risk. Demand is high and growing in response to winter weather forecasts. The supply and demand imbalance has resulted in benchmark European gas prices settling at a record 142.77 euros per megawatt hour on Dec. 16, an increase of 42% over closing prices of a week prior. We will be watching government responses to the conflict, along with the weather reports.