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Cheap US LNG just a mirage argues Tri-Zen

Asian-based gas specialists at Tri-Zen say potentially cheaper prices could lead to a supply shortfall

The notion of cheap liquefied natural gas (LNG) supplies from the US could be nothing more than a mirage. But the prospect of cheaper supplies has left buyers hesitating to make long-term commitments thereby creating a potential supply shortfall in 2020.  The conclusions – drawn by Asian-based gas specialists at Tri-Zen in their latest market perspective - arguably make a lot of sense.

Fewer long-term supply deals were fixed last year as customers hesitated, seemingly overwhelmed by too many competing projects and the continued quest for “cheap LNG”. The perception of inexpensive LNG supplies coming to market was sparked just over two years ago when BG struck the first deal to buy gas from Cheniere Energy’s Sabine Pass project in the US at a price linked to domestic gas prices.

At that time low Henry-Hub spot prices - around $2.50 per million British thermal units (Btu) in early 2012 - triggered a wave of euphoria about the prospects for landing LNG in Asia at around $10/m Btu, much less than the prevailing price of $17/m Btu into Japan at that time. Since then US gas prices have doubled – they hit $5.69/m Btu in January – and the price into Japan has fallen.

Tony Regan, an LNG specialist at Tri-Zen, points out that as US exports do not start till 2016, the real issue is where prices will be then, rather than in 2011. As the US gas market is one of the fastest expanding in the world, it is quite possible that Henry-Hub prices will climb further, while crude prices – tied to Asian-LNG pricing – are expected to fall over the next few years. Tri-Zen’s analysis shows that should US gas prices hit $6/m Btu in 2016 and Brent crude drops to $90 per barrel then cargoes priced on the US formula could be more expensive into northeast Asia than cargoes prices under the traditional Asian oil-linked formula.

On the supply side, proposed East African and western Canadian export schemes are capturing much attention, but many buyers are yet to make any real commitments. Regan says that buyers’ hesitation could be down to confusion as it has become increasingly tricky to evaluate opportunities based on the sheer number of proposed projects – 72 schemes offering 610m tonnes of new capacity worldwide - vying to capture their attention, as well an infatuation with so called cheap LNG.

In 2013, a total of 20 projects planned to take a final investment decision but in practice only three were approved. Regan expects that as reality bites, a more rational assessment of supply options in 2014 will emerge, with clearer support from buyers for the more robust liquefaction schemes. Potential candidates include: Kitimat, LNG Canada and Pacific North West in Canada; BG and Statoil’s proposed plant in Tanzania; Sakhalin Train 3 in Far East Russia; GDF’s Bonaparte floating LNG scheme in Australia; as well as Tangguh Train 3 and Abadi in Indonesia. Data from Tri-Zen shows global LNG capacity will hit 390m tonnes by 2018, about 50m tonnes short of expected 2020 demand.

Ultimately, potential US LNG exports – only one project has been sanctioned but another 24 have been proposed - offer much needed diversity of supply and contractual flexibility for buyers’ portfolios, rather than a flood of cut-price LNG deals. 

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