Natural Gas Ship Enters Boston

Speakers at the Energy Information Administration Conference in Washington, DC this week addressed three critical questions raised by the prospect of US LNG exports: how much US gas will the global market take, what impact will US exports have on global prices, and will development of unconventional gas outside of North America have a dampening effect on global LNG trade?

Wolfgang Moehler, IHS CERA Director of Global LNG, Ira Joseph, PIRA’s Executive Director of International Gas, and Jason Bordoff, Director of Columbia University’s Center on Global Energy Policy, all weighed in.

How Much Gas Will Global Markets Take?

Central to the debate over whether the US should restrict exports of domestically-produced LNG is the issue of how much US LNG the global market will take. While proponents of restrictions argue that the US could be exporting in the 20 billion cubic feet per day range, many energy economists have estimated that the ultimate volume will be far less.

New capacity coming onstream globally will mean stiff competition for US projects:

“We are currently in a tight global LNG market,” but “the ramp-up over the next 3-4 years will take us out of this very tight market or this very high spot price environment we are in at the moment,” said Moehler.

IHS estimates that the global LNG market will see 140 million tons of new demand by 2020, and another 15-20 million tons of retirements, against 100 million tons under construction.  “The room that we see for additional projects is only in the 60-80 million ton range…The 250 million tons that we see in the US will face some very strong competition to find significant markets.”

There’s a window of opportunity:

“The North American position in the market is not a static position. Its position between 2013 and 2016 is very different competitively to what it’s going to be post-2016 and beyond. So if the US government wants to push projects forward, expeditiousness is an important thing for the industry, because there is a competitive position in which the US market is sitting right now that is not always going to be there,” said Joseph.

The global market will take 5-6 bcf/d:

“There’s a sense that somewhere in the neighborhood of 5-6 billion cubic feet per day is what it’s likely the market would take,” said Bordoff.

What Happens to Oil Price Indexation and Regional Pricing?

Two more pressing question related to the prospect of US LNG exports, which are expected to be priced against US benchmark Henry Hub, is whether they will disrupt the traditional oil-linked contract pricing structure, and whether wide differentials between gas prices in Europe, Asia and North America will converge.

There’s already more of a connection between US and European prices:

“On the forward curve…you already do see somewhat of a connection in price between North American prices as expressed by Henry Hub and European prices, in this case the National Balancing Point, or NBP,” said Joseph.

“We already are beginning to see a connection between the two markets, and it’s a connection that’s going to grow over time.”

You could see the same in Pacific markets:

“LNG exports have the potential to lower costs in the Pacific,” said Bordoff.

“We will see pressure placed on oil indexation and contractual structures will become more flexible, you’re going to see more spot market development.”

But oil indexation will still have its place:

“We expect a significant part of the oil indexation to survive,” said Moehler. “For the LNG market to come down to  marginal cost, we would need to see a significant supply overhang or demand response.”

Could Global Unconventional Gas Disrupt LNG Trade?

One of the primary risks to forecasts for growth in global LNG demand is the possibility that countries presumed to hold vast shale gas resources might successfully develop them, resulting in production booms similar to what the US has experienced over the last five years.

Non-North American unconventional gas will happen, but to a lesser extent than in the US and Canada:

“We certainly do have Chinese shale – that’s really the critical market – built into our balances going forward. But it’s nowhere like what we’ve seen in North America,” said Joseph.

“We also have a small amount built in for South America, as well..and a little bit in Ukraine.”

Obstacles abound:

“It’s going to take some time to develop the unconventionals for both geologic reasons and above-ground reasons.”

It’s a big risk, sort of:

“The spread of unconventional production internationally is certainly one of the main uncertainties in the future of LNG market trade. And the location of those potential reserves also indicate the potential for disruption there,” said Moehler.

“In our view, none of those countries will develop as fast or as strong as the US.”

What Could Go Wrong?

“We wouldn’t talk at all about US LNG exports if we hadn’t been completely wrong in our expectations just 4-5 years ago,” Moehler said.