The large gap between domestic US natural gas prices and LNG prices in European and Asian markets that underlies the rationale for US LNG exports has raised the question: when US gas is sold abroad, who captures that spread?
The difference between low prices paid for gas produced in the US – currently trading at around $4.20 per million Btu on Nymex – and much higher prices paid for LNG imports in European and Asian markets – at more than twice US levels – is behind a push to open up export markets to US gas producers. As the debate rages over what impact exporting domestically-produced gas may have on the US economy, Senators Lisa Murkowski (R-AK) and Ron Wyden (D-OR) asked experts who profits from that price spread at a hearing before the Senate Energy and Natural Resources Committee on Tuesday.
“If you’re not making big profits on the price spread, who’s getting the spread?” asked Wyden. Wyden has been outspoken in his concerns that US LNG exports, absent government-imposed volume limits, could lead to higher domestic natural gas prices.
That spread is divided up among participants in the production, liquefaction, shipping and power generation processes, with a portion of savings ultimately passed on to consumers, according to Cheniere Energy Vice-President of Government and Regulatory Affairs Pat Outtrim and Sempra LNG President Otavio Simoes. Cheniere is currently building the Sabine Pass LNG export plant in Louisiana’s Cameron Parish, and Sempra is developing the Cameron LNG project in Hackberry, Lousiana.
Outtrim explained that the commercial agreements Cheniere Energy has struck with long-term LNG buyers from its Sabine Pass plant – the UK’s BG and Centrica, Spain’s Gas Natural Fenosa, Korea’s Kogas, India’s Gail and France’s Total – distribute benefits among several players.
“There is a spread, and each piece of that chain gets a bit of profit,” said Outtrim.
“We get a fixed fee from the liquefaction process,” said Outtrim. “Then the Henry Hub [natural gas] price is paid, plus 15% to cover the cost of actually liquefying the gas.” She added that the shipper receivez a percentage for transporting the cargo, as does the import terminal that regasifies the gas.
“When you’re contracting with a utility, as we did with English utility Centrica, that group is going to take the gas, and they will pass that savings onto their utility customers,” Outtrim said. Centrica has a contract to take 1.75 million tons per year of LNG from Sabine Pass’ fifth train. “You have $3 as the fixed fee, $3-4 as the commodity fee, plus another $3 to ship the gas, so you have a savings in Europe of $10 compared to a $12 fee that they’re having to pay as an oil-indexed price.”
Simoes added that in addition to shippers’, producers’, and other transaction participants’ takes from these deals, there is an additional benefit to buyers of US LNG, in that it improves their bargaining position in global markets.
“The reason that Asian buyers want to buy US LNG is that in their projections of what the Henry Hub might be – futures now show $5.00-$5.25/MMBtu – when you add $3 plus $3 plus $2, you end up with about $12 [$13] gas where they are, which is essentially giving them a floor for their competition of oil-linked prices,” Simoes said.
Assuming that the oil-linked LNG price is $14, “they know they can buy it for $12, that’s their bargaining power”, he said. “That’s the pressure we’re putting in Europe vis-a-vis Gazprom…that’s the pressure we’re putting in Asia for Russia, Middle East and Australia supplies.” Reports suggest that Gazprom, which supplies a large share of Europe’s gas imports, has responded to downward price pressure in natural gas markets by renegotiating some contract prices lower.
Outtrim and Simoes both challenged the notion that profits will all accrue to the companies drilling for and marketing the gas in the US. “It’s not like one entity – like the producer – gets a $9 per million [Btu] profit,” Outtrim said. “The natural gas supplier gets the same price [at which] he would sell to Dow Chemical or any other facility in the United States.”
“The producers simply have a larger market and can get a sustainable price for their product,” Outtrim said.
