US gas market on brink of transformation
The transformation of the US gas market is almost complete - and next year could see it take the crucial steps towards becoming a significant LNG exporter
Kwok W Wan, LONDON
Just 10 years ago, such a change was almost unthinkable. Then, the world’s largest gas market was rushing to build import terminals to supply an expected shortfall in demand. Now, however, the US could now supply up to a fifth of the global market
if all proposed export terminals are built.
And all this is due to the abundant production from the US’ prolific shale-gas plays, output which is changing the US LNG market in two stages. The first was to meet domestic gas demand and kill the LNG import market. This has happened already. The second stage will – potentially - allow the US to start exporting large volumes of LNG. This could be a few signatures away from reality, with customers lining up to fill up tankers with US super-cooled gas.
Cheniere leads charge
US LNG firm Cheniere Energy has been the main driver behind the gas metamorphosis. It already has LNG export authorisation from the US Department of Energy (DoE) for its Sabine Pass terminal, in Lousiana, and is awaiting approval from the Federal Energy Regulatory Commission (FERC) so it can start construction of the export facility. The facility is already capable of importing LNG. FERC is expected to give approval next year, with a final investment decision for the Sabine Pass export project expected shortly after.
At the tail end of 2011, Cheniere had already signed the first 3.5 million tonnes a year (t/y) LNG supply deal with BG Group, as well as a 3.5 million t/y deal with Spain’s Gas Natural Fenosa and one for the same volumes with India’s GAIL.
“GAIL will join BG and Gas Natural Fenosa as the next foundation customers for our Sabine Pass liquefaction project,” Cheniere chief executive Charif Souki said. “We continue to hold advanced discussions with additional global LNG buyers and expect to complete commercial discussion for the remaining capacity of the second phase of the project, train three, in the coming weeks.”
Phase one of Cheniere’s Sabine Pass LNG export project comprises two trains. Phase two comprises another two, which would mean total production of up to 18 million t/y. First LNG from train one is expected in 2015, with train two due on line in 2016. While the BG and Gas Natural deals are tied to phase one, GAIL’s contract is tied to train four which is expected online at 2017 at the earliest. All three LNG contracts are for a period of 20 years and are linked to US Henry Hub gas prices instead of thetraditional oil-linked contracts, such as those signed by Japanese and South Korean buyers.
Not happy with only Sabine Pass, Cheniere also proposed another LNG export facility at Corpus Christi in Texas, which could add another 13.5 million t/y production capacity. But there are still questions regarding gas prices and US energy policy, although neither seem insurmountable.
Fears for the domestic market
If the US starts exporting LNG, would domestic gas prices rise? US Henry Hub gas prices have remained flat at around $3-5/million British thermal units (Btu) for the last three years due to shale gas. And some fear that gas exports may erase the advantages of cheap energy, especially as the US faces economic uncertainty and the outsourcing of manufacturing jobs abroad.
But a report by the Deloitte Center for Energy Solutions expects the affect on Henry Hub prices for will be small.
“The Wold Gas Model projects a weighted-average price impact of $0.12/million Btu on US prices from 2016 to 2035 as a result of 6 billion cubic feet a day (42 million t/y) of LNG exports,” the report says. “The projected impact on Henry Hub prices is $0.22/million Btu, significantly higher than the national average because of its close proximity to the prospective export terminals.”
Deloitte also argues that the US gas market is dynamic, and due to the long lead time needed to build an LNG export terminal, producer, midstream players, and consumers can act to mitigate the effect on prices. Also, if US gas prices rise, then Canadian pipeline gas imports are likely to increase to take advantage of higher prices, while exports to Mexico decreases, and therefore rebalancing the market.
“Given that there is a significant quantity of domestic gas available at modest production costs, the export of 6 billion cubic feet a day of LNG should not significantly increase the price of domestic gas because it should not dramatically increase the production cost of domestic gas,” the report adds.
The other argument against US LNG exports is that it would run counter to a perceived need to achieve energy independence, but Deloitte says this is not consistent with reality.
“Energy exports from the US are not without precedent. The US has been exporting coal for years, as well as exporting LNG from Alaska. The US also exports gas to Mexico. The attention on LNG exports on security grounds seems inconsistent with these other examples,” it says.
“There is a frequently expressed desire for energy independence in the US, but there is no official US policy for energy independence.”
The report also says that gas cannot reduce dependence on oil, unless motor vehicles are converted to run on natural gas.
The US shale gas revolution transformed the global LNG market once by eliminating one of the market’s huge potential buyers. In 2012, it could do it again by adding a huge producer.