The emergence of the U.S. as a major producer and exporter of low-cost natural gas will force the global market to adjust its traditional business model, Charif Souki, Cheniere Energy Inc.’s chairman, CEO and president, told the Houston Producers’ Forum on Nov. 17.
“I think we’re going to see an evolution of the global markets toward the American model, in other words, gas-on-gas competition—a very liquid market where you can make decisions on whatever you need to do on an economic basis,” said Souki, who also told producers that he expects the price of oil to return to $100 per barrel (/bbl) “pretty soon.”
Souki, whose company’s Sabine Pass, La., LNG facility is on schedule to begin exports in mid-January, bases his outlook on global market developments over the next five years, particularly the massive supply ramp-up in the U.S., Australia and Qatar.
“Since Qatar and Australia both have significant demands ahead of them on a long-term basis, the U.S. is completely flexible,” he said. “You will have American prices in effect on a global basis—on a long-term basis. On a short-term basis, you will have dislocations [areas in which prices are higher or lower depending on demand].”
Souki acknowledged that the sunny outlook is clouded by the current downcycle, in which it appears that markets face an oversupply of natural gas. He believes the demand is there, but is just not apparent yet.
“We see a huge hole after 2020 in the supply of LNG on a global basis,” he said. “I don’t think any other country can provide it any better than we can.”
Achieving the liquid global market requires construction of infrastructure, which becomes difficult during a price downturn.
“All the production that is coming now is set for the next four years and after that it is on hold because nobody can [make final investment decisions on] additional projects on a long-term basis with current pricing,” he said. “Unlike building a pipeline or building a storage facility in this country, building an LNG facility is a five-year plan. It takes a lot of capital and it takes a lot of time in order to move this.”
So how does a player gather in the investment needed to spend five years building a facility intended to last 20 years? Knowing what will happen in the next five years would be helpful, but the constantly evolving energy business doesn’t allow that luxury.
“You have to be very nimble, very quick and keep your optionality as much as you can,” Souki said. “We’re all familiar with this. We all know what we need to do in order to get there. It’s not easy to get it done.”
His theory on a relatively swift return to $100 oil is based on his perception of the market:
- U.S. upstream investment has virtually disappeared;
- Production has fallen in reaction to low prices; and
- Global spare capacity is at a minimum.
“It’s only a matter of time before supply is less than demand,” he said. The rational price for a barrel of crude oil might be in the $75/bbl to $80/bbl range, but a lack of spare capacity will likely drive it higher.
“That’s why I think it’s going to happen,” he said. “It’s just a matter of when, and when it happens it will be more violent than everybody expects.”
Joseph Markman can be reached at jmarkman@hartenergy.com.
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