By Stacey Morris
Last week, we discussed the step change in US LNG export capacity expected next year and the role US LNG export projects could play in filling a potential global supply gap anticipated in the coming years. In today's post, we discuss how LNG exports increase infrastructure demand to the benefit of midstream. We also discuss how LNG exports facilitate natural gas production growth, with broad benefits for midstream companies and natural gas producers.
LNG exports increase infrastructure demand.
It probably goes without saying that infrastructure is needed to get natural gas from the wellhead to an LNG export facility. Gathering pipelines, processing plants (to remove impurities and separate natural gas liquids) and larger natural gas pipelines are generally required infrastructure between a natural gas well and a liquefaction facility. In some cases, new infrastructure may be needed, and in others, existing infrastructure may be expanded or reversed to supply natural gas to an LNG export facility. Of course, pipeline expansions are easier than newbuild projects and can be completed by enhancing pumps to increase capacity (greater compression).
Natural gas sourcing for each LNG project can vary. Cheniere (LNG, CQH, CQP) will use a combination of third-party pipelines, as well as pipelines Cheniere owns, to supply natural gas to its LNG export facilities at Sabine Pass and Corpus Christi. Cheniere's Creole Trail Pipeline is interconnected with several pipelines and receives volumes from Williams Partners' (NYSE:WPZ) Transco, Spectra's (NYSE:SEP) TETCO, and Energy Transfer's (ETP) Trunkline pipelines to supply Sabine Pass. For Corpus Christi, Cheniere's 23-mile Corpus Christi pipeline similarly connects to multiple natural gas pipelines, on which Cheniere has capacity. For example, Cheniere and Natural Gas Pipeline Company of America (NGPL) - jointly owned by Kinder Morgan (NYSE:KMI) and Brookfield Infrastructure Partners (NYSE:BIP) - signed a 20-year agreement providing capacity on NGPL for the gas supply at Corpus Christi. An expansion of NGPL will facilitate the capacity contracted for Corpus Christi. For a midstream company, it's not difficult to see the appeal in a long-term contract that supports an expansion project.
With its integrated approach, Tellurian (NASDAQ:TELL) plans to invest $7 billion to build a network of three pipelines, including a 2 Bcf/d pipeline from the Permian and a 2 Bcf/d pipeline from the Haynesville, with both terminating in Gillis, Louisiana. A 96-mile pipeline with 4 Bcf/d of capacity is planned between Gillis and the Driftwood LNG facility to supply the export facility. Upstream, TELL has acquired acreage in the Haynesville for producing natural gas.
While most LNG export facilities are planned for the Gulf Coast, that doesn't mean that gas supply will only come from the Gulf Coast. Thanks to the interconnectedness of US natural gas pipelines, Sabine Pass can source natural gas from every producing region in the Lower 48 east of the Rockies. This obviously includes the prolific Marcellus and Utica. While there can be different approaches for supplying natural gas to export facilities (newbuilds vs. existing capacity, owning pipelines vs. owning capacity on third-party pipelines) and the source of natural gas can vary, infrastructure provides the vital bridge between producing areas and LNG export facilities.
The broader benefits: LNG exports facilitate more US gas production.
LNG exports benefit energy companies broadly, not just those companies supplying the LNG export terminals or operating export terminals. How? Without the ability to export natural gas on tankers as LNG and via pipelines to Mexico and Canada, as shown in the chart below, the natural gas supply in the US would overwhelm domestic demand. This would have negative implications for natural gas prices (bad for producers) and limit production growth (bad for producers and midstream companies).
Source: US Energy Information Administration, Annual Energy Outlook 2018
The Energy Information Administration forecasts that dry natural gas production will grow to 84.5 Bcf/d in 2019. With US LNG export capacity expected to approach 10 Bcf/d in 2019, almost 12% of US dry natural gas production could be used for LNG exports. The incremental gas demand from LNG projects helps facilitate the expected growth in natural gas production. Production growth benefits midstream companies as volume-driven businesses. More natural gas means more volumes to gather, process and transport, and that requires more infrastructure. In this way, LNG exports support growth opportunities for natural gas pipelines and processing plants.
As we discussed last week, the US is poised to play an important role in the global LNG market and may play an even bigger role as additional projects reach final investment decision (FID). Since our post last Tuesday, potential permitting delays for LNG projects have been in the headlines, with media reports that FERC reviews may be delayed 12-18 months. Permitting progress and additional FID announcements will bear watching - and not just by LNG suppliers and customers. Given that LNG exports increase infrastructure demand and extend the runway for US natural gas production growth, midstream companies will also have an interest in LNG export projects moving forward.
Disclosure: © Alerian 2018. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers.
Stacey Morris is the Associate Director of Marketing at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Morris engages with the investment community to increase awareness of the Alerian Index Series and support broader understanding of the role that midstream assets play in North American energy markets. Ms. Morris was previously the Investor Relations Manager for Alon USA Energy, overseeing investor communications for the corporation and its variable distribution MLP, Alon USA Partners. Prior to Alon, she covered the integrated majors and refiners at Raymond James as a Senior Associate in the firm’s Equity Research Division. Ms. Morris graduated summa cum laude with a Bachelor of Science in Business Administration from Stetson University, and is a CFA charterholder.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.