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A market hungry for US LNG amid price concerns

Companies are queuing up for potential US LNG exports, but domestic consumers are worried about the impact on Henry Hub gas prices

Two more deals to secure US liquefied natural gas (LNG) production have been signed in recent days, pushing forward the case to green-light export projects. But lingering concerns remain over the effect on domestic gas prices.

South Korea’s Kogas signed a 20-year agreement to buy 3.5 million tonnes a year (t/y) from train three of Cheniere’s Sabine Pass export project on 30 January. And on 27 January, BG Group increased its offtake commitment to 5.5 million t/y, from 3.5 million t/y, when Sabine Pass’s trains two, three and four are commissioned.

"Kogas is our fourth foundation customer and we have now sold 16 million t/y of the 18 million t/y [of export capacity] being developed at Sabine Pass," Cheniere chief executive officer Charif Souki said. He added that the decision to sell additional LNG volumes to BG Group, rather than on the spot market, would ensure the project’s long-term cash flow. The remaining 2 million t/y will stay in Cheniere’s trading portfolio.

Under its agreement, Kogas will pay $3/million British thermal units (Btu), plus 115% of the US Henry Hub gas price. BG’s additional 2 million t/y is priced on the same formula, which is more expensive than that for the first 3.5 million t/y. Spain’s Gas Natural Fenosa and India’s Gail also signed 3.5 million t/y deals late last year.

Cheniere said phase one of Sabine Pass comprises train one and two, with a combined production capacity of 9 million t/y. Construction is expected to start early this year, with commercial operation by 2015/16. Phase-two construction, comprising trains three and four, should start in 2013, with first shipments in 2017/18 .

The firm added that interest in US LNG is so great that it is now considering adding a fifth and sixth train at Sabine Pass, as well as developing its Corpus Christi LNG-import terminal into an export project.

State-owned Gail is already looking to sign another US LNG deal. According to reports, it is in talks with the operators of Texas’ Freeport LNG import project. Gail is said to be looking for around 2 million t/y. The move comes as Indian LNG import capacity is set to almost double to 20 million t/y over the next five years to meet power and fertiliser sector gas demand.

Indonesia's PT Nusantara Regas - a joint venture between state oil company PT Pertamina and gas company PT Perusahan Gas Negara - is also in talks to buy US LNG.  Although presently an LNG exporter, the Indonesia plans to import LNG in the next few years to meet growing energy demand.  PT Nusantara Regas expects to import 2 million t/y from 2017 and is developing a 3 million t/y floating LNG import plant in West Java.

Shale-gas boom

US LNG exports have been made possible by the country’s shale-gas boom, which has turned the country from an expected gas importer to potentially substantial exporter. If all the proposed projects are realised, the US could supply a fifth of the global market.

High cost of exports?

But despite the potential for US LNG exports, large domestic energy users, such as Dow Chemical and aluminium producer Alcoa, have voiced concern about the effect of exports on domestic gas prices.

A report by the US Energy Information Administration (EIA), released last month, made a range of predictions for potential effects on prices, and concluded that US domestic gas prices could increase significantly.

In its reference case, based on projections of 66.1 trillion cubic feet a day (cf/d) of US gas production in 2025 and 73.0 trillion cf/d in 2035, the EIA forecasts that a slow ramp-up/low export case of up to 42 million t/y, over six years, would result in a 14% ($0.66/million Btu) wellhead gas price jump in 2022. In the quick ramp-up/high export case – up to 84 million t/y over four years – wellhead prices are expected to increase by 36%, or $1.50/million Btu, in 2018.

In an outlook where shale gas production achieves only half of expected volumes, a quick ramp-up/high volume case could cause prices to jump by 54% (or $3.07/million Btu) in 2018. This is very worrying for US industry, which sees cheap gas as a potential cost advantage in a globalised market place, and are lobbying to restrict the number of LNG export projects to keep domestic gas prices low.

"By anyone’s measure, these are substantial cost increases," said Paul Cicio, president of the Industrial Energy Consumers of America. "Consuming domestically produced gas to make value-added products here and ship them overseas is a better alternative for manufacturers in the country."

Although the US Department of Energy (DOE) has approved LNG exports from Sabine Pass, there is a clause in the agreement that allows it to review the decision. It states: "We intend to monitor those conditions to ensure authorised LNG, and in future natural gas exports do not subsequently lead to a reduction in essential domestic supply. [The] DOE is authorised … to take action, as necessary or appropriate, should circumstances warrant it."

Overestimates

The EIA report has also been criticised for overestimating the speed and volumes of LNG exports, which in turn has exaggerated the effect on prices. "We expect a few projects (totalling 2 billion cf/d [14 million t/y]) of North American LNG exports by 2017," said Barclays Capital (BarCap) commodities researcher Michael Zenker, adding that the worries about rising domestic gas prices will cap export volumes.

In the EIA analysis, the low-export case of 42 million t/y would mean the US supplies nearly a fifth of the global market within six years, while the high case (84 million t/y) could have it supplying around a third in just four years.

But, said one US LNG trader: "It’s unrealistic that US exporters will want to flood the global market with anything like that volume. An international LNG price collapse is in no-one’s interests."

The EIA’s price expectations are in sharp contrast to those posited in a recent Deloitte report, which forecast a $0.12/million Btu Henry Hub gas price increase from 2016 to 2035, based on 42 million t/y of LNG exports.

North America’s gas glut, stemming from soaring shale-gas production, has pushed US gas prices to 10-year lows, at under $2.40/million Btu. Europe pays around $8/million Btu for gas, while Asia pays around $15/million Btu, making the prospect of US LNG exports very attractive.

But exports are viable only if shale-gas production levels can be maintained in the long term. The foundation of US LNG-exports is the belief that shale gas production will remain plentiful – and cheap.

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