With the departure of the historic first exports of LNG from Cheniere Energy Inc.’s Sabine Pass terminal this winter, the U.S. is poised to become a net exporter of natural gas. But while export capability may relieve a bit of the gas supply glut, the immediate benefit for domestic producers is muted. Competition and weakening global economies have tamped down both prices and demand.

The foundation for North American natural gas exports was laid by the U.S. shale gas boom. As production outstripped domestic need for gas, demand from booming economies in Asia and elsewhere beckoned, as did higher global LNG prices, compared with slumping U.S. prices.

“There was this notion with North American producers that demand was infinite—particularly Asian demand,” Tom Campbell, director, LNG and Gasification, Stratas Advisors, noted.

The market that U.S. LNG exports are entering today is far different than the one anticipated when export project construction began. U.S. import facilities built before the shale boom, when supply was expected to run out, became irrelevant, and Cheniere and other developers switched gears to export gas. For Cheniere, retrofitting an existing import facility was expedient; other developers launched bidirectional conversions or purpose-built projects.

The company was early out of the gate, gaining regulatory approval to export 6.3 billion cubic feet a day (Bcf/d) from its Sabine Pass terminal and a terminal in Corpus Christi that is still under construction.

But an unanticipated confluence of events happened on the way to that pricey global market. International players went to work on their own massive LNG buildout, mainly in Australia and Asia, and by late 2014 demand growth began to slow worldwide, particularly as China’s growth faltered. With global supplies rising and demand weakening, the sky-high prices for LNG that had promised salvation for U.S. producers toppled from some $18.50/MMBtu at the beginning of 2014 to about $8 or even less today. Crude oil prices began their own meltdown in late 2014, further pressuring LNG.

Economics shifted

U.S. LNG players retreated as the economics of exports worsened. At one time, under the leadership of since-removed founder and CEO Charif Souki, Cheniere had planned to construct five additional trains that would facilitate shipping “10% of current U.S. gas production abroad,” The Wall Street Journal reported. Instead, the company’s new management has mothballed the proposed expansion.

While Cheniere is being cautious, Souki still sees opportunity in LNG. In February, he and Martin Houston, former COO and executive director of BG Group Plc—a global LNG player—formed Tellurian Investments to dive back into the export business. Their ambition is to build an export plant near Louisiana’s Calcasieu River at a cost of $6 billion to $8 billion.

The type of global shift that can upend the LNG market is exemplified by the experience of Japan. The country’s gas consumption, all of which is supplied by LNG, has been flat to down since 2012 due to the recovery of its nuclear power industry since the Fukushima disaster and an uptick in solar power development, according to a report by Raymond James. This is occurring just as North American LNG exports hoped to gain momentum. Japan represents the biggest market for LNG, making up half of global demand, Campbell noted.

China, another substantial buyer, may also be reducing its need for LNG. It is committed to developing its own unconventional natural gas resources and is moving forward with plans to pipe in Russian and central Asia gas to an ever greater degree, which would add more competition to the LNG market.

Europe, which had flirted with using North American LNG to diversify and reduce its reliance on Russian natural gas, is now giving U.S. exporters the cold shoulder. Its preference for cheaper imports from Gazprom has historically outweighed its desire for greater energy independence from Russia. Also, Europe’s gas demand has diminished as economic recessions linger and a focus on renewable fuels intensifies.

Still, certain North American project developers will be able to drop anchor in the emerging global LNG market. Campbell points to Dominion’s Cove Point, Cheniere’s Corpus Christi and Sabine Pass, Freeport’s facility in Freeport, Texas, and Sempra’s project in Cameron, Louisiana, as “moving along—they’re going to happen.” When they are complete, North America will emerge as the fourth-largest export region, following Asia Pacific, Middle East and Africa. These five major, early-approved export facilities represent the roughly five to eight that are likely to see the light of day of the 50-some projects Stratas Advisors is tracking across North America. However, the number of viable projects could dwindle.

Jordan Cove, a project that was approved in 2014, is the very first to be denied permits by the FERC. In its release, the commission stated that the associated pipeline would have more adverse consequences than benefits. This unpredicted decision has created doubt for hopeful exporters banking on a foolproof permitting process. “The question then becomes: Who’s next?” asked Campbell. “What does this mean for the standards of approval?”

Like the U.S., Canada is desperately seeking outlets for its natural gas. Its one international customer, the U.S., needs less Canadian gas every year due to the shales.

“Canadian projects all face challenges from a need to develop costly pipeline and terminal infrastructure in rural environments, and some are also confronted with challenges in the context of working with local First Nations that may oppose plants,” Campbell said. “In addition, the Canadian regulatory environment has proven more difficult to navigate than many proponents had hoped.” One export plant in British Columbia may eventually come online, but probably not until post-2020.

Globally, the supply side also doesn’t look good for North American producers. The push is on by other countries to develop their own unconventional resources, reducing LNG demand. In certain cases, competing projects globally are better-positioned financially and geographically than those in North America. Some are closer to markets, reducing transportation costs, while others have lower build-cost environments, he said. Countries working to develop their indigenous shale production include China and Argentina.

The competition faces challenges, of course. The World Energy Council reported recently on some of the uphill battles. China has massive shale gas reserves, but they are in the Sichuan Basin, a highly populated area where water is scarce. Argentina is still relatively early in the learning curve of how to produce oil and gas from shales.

These obstacles may give North American production and exports some time and room to run. But the potential for higher prices is constrained. “Although it is inevitable that interlinking North America natural gas prices with higher-priced global markets will help lift prices to a degree, the reality is that because LNG is still a fairly non-liquid and regionally oriented market, even beyond the current global low price environment, the boost to prices will be minimized,” said Campbell.

U.S. producers

As 2016 rolls on and more LNG exports from the U.S. launch, gas producers are as long-faced as they are fresh-faced. Exporting LNG is “an opportunity, but not the savior opportunity people were pitching it as,” Campbell said. North American producers have created some more demand for gas, “but not the titanic number they were hoping for. They’re winners, but they may not feel like winners.”

Since 2007, Japanese hub prices have consistently outstripped Henry Hub and the U.K. National Balancing Point market (NBP).

Subash Chandra, managing director and senior equity analyst with Guggenheim Partners, said that in general, he is more enthused about exports to Mexico than he is about the prospects for U.S. LNG. “I think we can much more quickly export an incremental 1 to 2 Bcf/d to Mexico than through U.S. LNG,” he said.

“The capacity utilization of the LNG plants will be price-sensitive, so I am assuming 50% utilization. But that is a guess, it can be better, it can be worse. There are no contractual commitments to export 100% of the capacity of these terminals.”

Various marketing entities will take the U.S. LNG and sell it globally, depending on demand, and Chandra thinks most of the supplies will be confined to the Atlantic Basin. “The Mexican exports benefit Permian producers, as they take Waha Hub gas, but the beneficiaries of LNG exports are harder to call,” he said.

“Eastern [U.S.] markets should benefit in general, at the expense of Rockies gas. LNG can serve as a safety valve for excess supplies, but I am doubtful that it ‘sets’ price near- or intermediate-term. Some Appalachian producers have secured sales to facilities such as Cove Point as part of firm sales portfolios, so perhaps they are the most direct beneficiaries.

“But in general, I don’t see the LNG theme as dominant,” he continued. “And I am wary of the forecasting errors made when LNG import terminals were being built. Just as we didn’t import much gas, we may not export much gas.”

Sheetal Nasta, a fundamentals analyst with RBN Energy Inc., noted in a report that it is still much too early to see the full impact of these flows [into the Sabine Pass Terminal] on prices. “However, depending on how consistent or inconsistent the flows are to the terminal, the incremental demand is likely to provide some support (albeit volatile) to pricing points upstream of Sabine, including Houston Ship Channel and NGPL-Texok in Texas as well as for Northeast producers shipping south on Tetco,” she wrote.

“As the expansions to flow more Marcellus/Utica gas southbound come online, Northeast supplies can be expected to take a greater market share of LNG exports,” she added. “That could provide invaluable price support for battered Northeast producers. However, additional flows from the Northeast into the Gulf Coast region will also intensify price competition between the various gas supply sources (both local and long distance) looking to capture this incremental demand.”

LNG exporters like Cheniere may have the most to gain. As the only North American exporter of natural gas until early 2018, when other projects will catch up, Cheniere has signed 20-year contracts with BG Group and Total, insulating itself from dips in LNG prices. It has locked in profit margin for 25 years on an individual contract, with fees including its return on investment.

“If all goes according to plan, exporters are wonderfully well-positioned,” except for the possibility of buyers attempting to renege on contracts, Campbell said.

In 2015, the bulk of global export capacity is expected to be controlled by the Middle East and Asia.

According to Stratas Advisors’ forecasts, the Henry Hub price, which experienced a spike up to $8.71 in 2005, compared to $5.89 in 2004, was $2.66 last year. It’s projected to increase a meager two cents this year and seven cents further in 2017. But by 2020, it should rebound to $4.11, as low prices drive up demand, and producers could benefit. Demand will pick up in Asia, not only in China and Japan, but also in other areas such as Pakistan and countries in Southeast Asia, according to Stratas Advisors. Additionally, demand should emerge in Africa; an import terminal was even built last year in Egypt.

As expected, Japanese LNG currently fares better than Henry Hub at $8.25, and is expected to continue its dominance in 2020, hitting a high of $10.82.

North American producers went overboard with production and now find themselves soaked with oversupply, despite access to new markets. “People love a silver bullet, and LNG isn’t that,” Campbell said.