Steams rises from the Kawasaki natural gas power station in Kawasaki city, Kanagawa prefecture, south of Tokyo on August 25, 2011.
Japan’s Fukushima disaster, with the subsequent shutdown of most Japanese nuclear power plants, mean US exports of liquefied natural gas (LNG) to Asia will be profitable to 2020 – but maybe not beyond.
That was the consensus of experts speaking to the US Energy Information Administration’s (EIA) International Natural Gas Workshop in Washington, DC recently.
They see US LNG exports as initially profitable, but current Asian prices as unsustainable and see changes coming in Asia’s traditional pricing method for natural gas.
Asian LNG contracts link gas prices to a basket of crude oils imported into Japan. With world oil prices persistently above historical norms, the linkage means Asian customers often pay five times US prices for their gas. US domestic prices are currently depressed due to ample shale gas supply and decreased demand, so the potential profit margin for exports appears substantial.
Asian buyers are already seeking cheaper US alternatives. Sovereign wealth funds from China and Singapore have invested in the first federally-permitted large US liquefaction plant, Cheniere Energy’s $5.6 billion Sabine Pass, and Japanese, South Korean, and Indian buyers have signed up for output.
You can’t overstate the effects of Fukushima on the LNG market,” – Schlesinger
Construction has just started there; first exports won’t occur before 2015. More than a dozen other projects are under federal review, and they couldn’t begin exporting before 2016.
Robert Smith of Facts Global Energy in Singapore said Asian LNG demand grew 16.5% in 2011 due to Fukushima, and he thinks Japan will restart only about half of the nuclear capacity that, before March 2011, supplied nearly a third of the nation’s electricity.
“You can’t overstate the effects of Fukushima on the LNG market,” said economist Ben Schlesinger of Benjamin Schlesinger & Associates. Japanese delegations “are literally begging the US” for LNG export approvals as they face ruinous import costs, he said.
Even when Japan restores nuclear capacity, it will replace more costly oil-fired capacity, not natural gas generators, so LNG demand won’t fall off in the medium term, Smith said.
South Korea and Taiwan are also major LNG importers, Southeast Asia is a growing gas market, and China’s demand has been dynamic, said Smith.
He said China is pursuing multiple sources of natural gas, including pipelines from Central Asia and Russia, and the nation is believed to have huge shale potential that could make it self-sufficient should the government decide to focus on exploiting that resource.
Asian LNG now comes mainly from the Middle East, but many nations there are using more gas to meet growing domestic demand, exporting more profitable oil.
Economist James Jensen of Jensen Associates said the largest LNG exporter, Qatar, may not be able to expand production easily because of technical constraints in its existing fields, despite considerable resources. Smith expects exports from the Middle East to remain at about their current level.
But significant new LNG capacity is being built in Australia, said Smith, and with US additions, LNG could be in surplus in Asia after 2020.
The experts agreed the current huge price differential between Asia and the US cannot survive over the long term. Already, buyers are looking to use contracts indexed to the Gulf Coast’s Henry Hub natural gas price benchmark to hedge their price exposure in Asia, Smith said, and as contracts come up for renewal, buyers are demanding new terms.
He expects to see increasing emergence of “hybrid” contracts that use developing Asian natural gas trading hubs in their indexing arrangements.
Smith added that, with processing and transport costs, US natural gas will never be “cheap” by the time it reaches Asia, and he and other experts saw limits for development of a non-contract “spot market,” like the one existing in oil, because of the tremendous investment required to safely liquefy, transport and regasify LNG.
Many market players hope widening of the Panama Canal will make US exports from the Gulf Coast to Asia less expensive. Starting in late 2014, the canal will be able to accommodate LNG tankers. Smith cautioned that the canal authority hasn’t announced new tariffs or conditions for passage of LNG cargoes, so the effects are unknown.
This is the third 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, read the first two pieces here and here.