Hopes that the advent of liquefied natural gas (LNG) exports from the United States to Europe could help bring down European prices may prove misguided, according to VTB Capital’s head of energy research, Colin Smith.
“Is US LNG going to cut gas prices in Europe? Probably not by very much, if at all,” Smith said at the VTB Capital New York Investment Forum on April 10.
Natural gas prices in Europe, which are linked to the price of oil, are substantially higher than prices in the US, which have cratered amid rapid and sustained supply growth from shale development. Consumers in higher-price markets in Europe and Asia have been eyeing the US as a potential new source of cheap supply.
At a US price of $3.00 per million Btu [MMBtu], about $1.00 less than the current front-month Henry Hub price, the delivered cost of US LNG to Europe – including plant operation charges, storage, transportation, and regasification – would be around $8.30/MMBtu, “which absolutely is a very competitive price”, Smith said.
However, Smith suggested that $3.00/MMBtu will not be sufficient to sustain US production.
“Neither shale gas nor shale liquids are cheap,” Smith said. “They they need a high enough price to more forward.” VTB has estimated that full-cycle shale gas economics for a large share of marginal gas supply is closer to $5.00/MMBtu.
Assuming that US prices eventually rise to $5.00/MMBtu, the difference between the delivered cost of US LNG to Europe – $10.60/MMBtu, according to VTB estimates – and what European consumers currently pay for gas would be much smaller.
“The delivered price into Europe, with a $5.00 gas price in the US, is not actually going to be barnstormingly cheap,” Smith said.
The differential between US and European prices may eventually narrow, Smith said. But with US LNG off the table as a means of bringing down European prices, that narrowing may be driven solely by higher prices in the US.
“The question is, can you get large-scale, cheaper volumes from somewhere else? If you can, there’s a threat to European pricing,” Smith said. “If you can’t, then European pricing is going to stay roughly where it is.”