Exporting liquefied natural gas (LNG) from the US will raise domestic natural gas prices little – and possibly not at all – because the international market won’t take enough LNG to make a difference.
That was the conclusion of three economists who separately studied international LNG prospects. They presented their results to the International Natural Gas Workshop sponsored by the US Energy Information Administration (EIA) in Washington DC recently.
The analysts pointed to the substantial gas price differentials now existing between the US Gulf Coast and major European and Asian natural gas trading hubs. The US price has been around $2-3 per million Btu, while Europe pays $9-10/mmBtu and Asian nations, more than $15/mmBtu. Those differences look like an attractive market opportunity to US natural gas producers.
But all three experts said LNG is highly competitive and other international players won’t stand still while US exporters enter the market.
Both European and Asian markets have gas trading hubs but the majority of their LNG is priced on contract formulas connected to oil – to a basket of refined products in Europe, and to a group of crude oil imports in Asia. With oil prices trading at the higher end of the historical price spectrum, natural gas contract prices have soared, and Asian and European natural gas buyers are already balking and insisting on contract renegotiations.
Kenneth Medlock III, Fellow at the James A. Baker III Institute for Public Policy at Rice University, said big buyers are getting a variety of concessions that lower their costs. Among the hardest pressed are utilities in Germany and Japan, which need alternatives to nuclear capacity shut down after the Fukushima disaster.
Medlock said US LNG exports could exert “significant downward pressure on prices,” particularly in Asia. He noted that major Asian consumers such as South Korea’s Korean Gas Corp. (KoGas) and GAIL (India) Ltd. have already signed long-term contracts with Cheniere Energy Partners for LNG from Cheniere’s Sabine Pass liquefaction plant, to be operational in 2015.
Sabine Pass, in Louisiana, is the only terminal outside Alaska with US Department of Energy permits to export LNG worldwide. More than a dozen others are waiting while DOE studies the potential effects of further exports on domestic natural gas prices.
But Medlock said his models found a market for no more than 1.2 billion cubic feet per day of US LNG. That’s less than Sabine Pass can produce by itself. The entire world market is now about 32 Bcf/d.
Dale Nesbitt, Senior Manager, Deloitte MarketPoint, said European and Asian markets would “respond dramatically” to entry of low-priced US LNG. Contracts will be reopened and prices will “converge” globally, he said.
Philip Hanser, Principal, The Brattle Group, said LNG exports require so much up-front capital investment – an estimated $5 billion in the case of Sabine Pass, just to add liquefaction to an existing LNG ship terminal – that the market for US exports is small and the window to act is already closing.
“Non-US supply competition is robust,” Hanser said. Producer nations like Canada, Russia, Qatar, and Nigeria will protect their market shares and “will react even before we do anything,” he said.
Hanser said US producers could export 6-12 Bcf/d without boosting domestic prices enough to trigger a political reaction, but he agreed with Medlock that the actual market for US LNG would be smaller.
He said US exports would push the rest of the world away from oil indexing and toward market-based prices, eliminating the wide differentials that undergird US export potential.
Nesbitt said his models showed “no exports,” and he thinks no more than one terminal will be built.
Medlock and Nesbitt suggested that the largest market players could use a terminal like Sabine Pass, with import and export capability, for storage, buying cargoes cheap and selling them when the market tightens. That tactic is common in US domestic markets, but Asia and Europe currently have far less storage capacity than the US.
This is the first article in a three-part Breaking Energy series on the potential impacts US LNG exports could have on domestic and international natural gas market dynamics.