Joshua Mann
Houston Business Journal, Feb. 15, 2019
Houston may be called the energy capital of the world, but there’s a growing international market for a fuel that probably won’t be making its way out of the Bayou City’s ports any time soon — liquefied natural gas.
That’s particularly relevant because a burgeoning LNG spot market is starting to appear in the U.S. Gulf of Mexico, said Mike Varagona, vice president of business development for Houston-based Kinder Morgan Inc. (NYSE: KMI). Kinder Morgan is one of many companies trying to build an LNG export terminal on the Gulf Coast, looking to take advantage of the ravenous demand for the fuel in East Asia and the excess of supply in the U.S.
Cheniere Energy Inc. (Nasdaq: LNG) is the only company to complete an LNG export terminal on the Gulf Coast so far, and it is one of just three companies with such assets anywhere in North America. Cheniere has already been selling spot cargoes of LNG out of its Sabine Pass LNG Terminal in Louisiana, Varagona said.
And with more assets on the way, a vibrant Gulf Coast LNG spot market only becomes more likely, said Riccardo Bertocco, partner and managing director at Boston Consulting Group Inc., a management consulting firm based in Boston. Bertocco is one of BCG’s LNG experts. The only problem is that none of those terminals seem to be cropping up anywhere near Houston.
“If you think about LNG facilities, they’re already spoken for, and they’re not in Houston,” Bertocco said. “I don’t see an LNG facility (being built) in the ship channel.”
The density of Houston-area petrochemical infrastructure would make building LNG trains there “tremendously difficult,” said Campbell Faulkner, senior vice president and chief data analyst for OTC Global Holdings LP, an over-the-counter broker in energy commodities. The electric power needs alone of such facilities would strain the Houston-area power grid to a point where it makes more sense to build elsewhere on the Gulf Coast, Faulkner said.
If construction of those facilities did take place in or near the city, it would create more jobs and trade for Houston, much like the crude oil complex that has risen in the city since oil exports were legalized in 2014, Faulkner said. Even so, the Bayou City still doesn’t miss out on much by not being the infrastructure center of the spot market, Faulkner said. Houston houses the central offices of many of the most prominent players in the LNG export game, from Cheniere and Kinder Morgan to Tellurian Inc. (NYSE American: TELL) and Liquefied Natural Gas Ltd.
“The bulk of the operations and marketing staff will still be based in Houston,” Faulkner said. “Houston benefits from the growing physical infrastructure via sourcing of the materials and labor skills for the wider area.”
Kinder Morgan is building both of its LNG export projects well away from Houston — one is in Mississippi, the other is on the Atlantic Coast in Georgia. That’s not because of issues in Houston; it’s because the company already had assets established in both of those areas, Varagona said.
“Basically, we were already there, so it didn’t take a whole lot of thought,” Varagona said.
There are still other ways for Houston to take part in the LNG infrastructure network. LNG export facilities have a hard time ramping up or down production, so a consistent supply is an important part of operations, Varagona said. Storage facilities can help a lot in that, and some of the largest storage companies in the world have footprints in or near Houston, Bertocco said.
Kinder Morgan, which has a broad network of natural gas pipelines, has already signed contracts with some storage companies to supply gas pipeline infrastructure, Baragona said.
Growing regional spot market
The Gulf Coast is already well on its way to becoming an LNG spot market hub, Bertocco said. There are already a multitude of export facilities either under construction or looking for regulatory approval, so the question is how many of those move forward into completion, Bertocco said.
“With the number of projects on paper, those would generate potentially a significant oversupply of LNG, and therefor a significant spot availability,” Bertocco said.
And there is already spot activity on the Gulf Coast. London-based S&P Global Platts already has a price assessment for LNG on the U.S. Gulf Coast. While that is usually based on logistical costs to move LNG to a more liquid hub in Asia or Europe, there is infrequent trading in the Gulf Coast spot market that can affect the assessment, said Francis Brown, editorial director at Platts.
While Gulf Coast spot trading is sparse right now, it is growing and will probably continue to do so as more export facilities come online, Varagona said.
The existence of a growing spot market doesn’t change much for Kinder Morgan, Varagona said. That’s because the midstream company would want to have nearly all of its terminal capacity under contract before it moves forward with a project, he said.
“In order for us to go forward with the development, we would want almost 100 percent subscribed,” Varagona said. “In the grand scheme of things, it doesn’t affect FID. We’re not in the business of taking commodity risk.”
A thriving spot market could help the company track pricing, though, Varagona said.
As the global markets develop, it’s conceivable that the now-dominant demand hub in Asia would start facing more intense competition from demand in Europe and elsewhere, said Brown. And as demand hubs compete, supply hubs like the one blooming in the Gulf Coast become more important, he said.