McKinsey: Shale Poised for Big Role in Long-term LNG Demand

U.S. gas producers can compete to fill a looming supply gap for LNG as global demand grows, according to an analysis by McKinsey & Co.

Across a myriad of different energy transition scenarios, global demand for LNG is forecast to see robust demand growth through at least 2040, McKinsey Partner Dumitru Dediu said during Hart Energy’s America’s Natural Gas Conference on Sept. 27.

European demand is expected to drive that growth in the near term as the continent moves to replace volumes of piped Russian gas with other supplies.

In the medium to long term, demand growth is expected to come from nations in Southeast Asia seeking access to more reliable, affordable and cleaner energy sources.

“Asia beyond China,” Dediu said. “China will have a big role to play—but beyond China, there are a lot of countries out there.”

U.S. producers and LNG developers are investing billions of dollars to meet some of the growing global demand.

Gas demand for U.S. LNG exports is expected to grow by 17.4 Bcf/d between 2023 and 2030, said Justin Carlson, co-founder and chief commercial officer at East Daley Analytics; LNG will make up more than a fifth of total U.S. gas demand by that time.

More than a half dozen new liquefaction projects are under construction in the U.S., according to U.S. Energy Information Administration data.

But into the 2030’s and beyond, a global LNG supply gap begins to open. And there are questions about whether U.S. gas supply—hampered in some regions by litigation and regulatory red tape—can meet the growing demand.

“Many of these scenarios actually show even higher demand, showing a gap of at least 50 million tons [of LNG capacity],” Dediu said.

“In some scenarios, 150 to 200 million tons of LNG capacity … will need to come onstream in the 2030’s to meet the growing LNG demand out there,” he said.

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Cost and security

U.S. LNG is expected to meet a portion of the growing global demand for several reasons, including cost competitiveness and security of supply.

McKinsey’s survey of LNG buyers, which accounted for more than 70% of the global LNG market, found that buyers see U.S. LNG as one of the most cost-competitive sources of supply worldwide.

“Especially in the current environment with Henry Hub below $3/MMBtu, you can bring the LNG from the U.S. at below $8/MMBtu in Europe or in Asia—compared to prices north of $10/MMBtu to $15/MMBtu,” Dediu said.

However, U.S. LNG’s competitive edge could wane on the global scale over time due to factors such as takeaway constraints.

A lot of the most cost-competitive gas is being produced in the Permian Basin and in Appalachia plays such as the Marcellus Shale. Additional gas pipeline capacity is needed to move the gas from the shale patch to the growing number of U.S. LNG export facilities.

But building new interstate gas pipelines is pretty difficult to do. The Mountain Valley Pipeline recently required an act of Congress to move forward.

It’s much easier to develop an intrastate pipeline in Texas or Louisiana, which is why a significant portion of the gas for LNG exports is expected to come from the Permian and Haynesville and Eagle Ford shales.

“Without new infrastructure, we may see Henry Hub prices increasing and, respectively, other less competitive basins supplying these LNG projects,” Dediu said.

Other factors that could lead to rising costs include engineering, procurement and construction and supply chain constraints, as well as access to commercial financing and long-term sale and purchase agreements.

Buyers also see the U.S. as one of the most reliable sources of gas globally—more reliable than Canada, Australia and Mexico, according to the McKinsey survey.

“The world needs more gas, more LNG, to support growth,” he said. “LNG will also play a major role in helping switch away from coal to a cleaner-burning fuel like gas.”

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