|
Will North America impact LNG markets? Industry ponders how exports could diversity global market; create new options for buyers, sellers; possibly new pricing patterns Larry Persily Federal Coordinator Office of the Federal Coordinator
The experts, analysts and corporate officials were agreed that North American exports of liquefied natural gas could help diversify the global LNG market, creating new options for buyers and sellers, and possibly new pricing patterns.
But speakers at the May 16-17 North America LNG Export Forum in Houston disagreed on how much market share U.S. and Canadian producers could score in the competitive marketplace and whether the new supplies would significantly knock down high oil-linked prices for LNG in Asia.
They agreed it would be easier, quicker and cheaper to build an LNG export terminal at the site of an existing import terminal — as several U.S. operators have proposed — than to break ground and build on undeveloped land.
But they disagreed on how much LNG the world will need in the years ahead, particularly Asia, and how many LNG export projects the U.S. Department of Energy might approve. And how much politics would influence the debate over U.S. exports.
“The world will not disappear if there is no U.S. LNG export, but it is nice to have it,” said Guy Broggi, senior adviser at the LNG division of Total Gas & Power, part of the French oil and gas major Total.
Potential new LNG supplies worldwide far outstrip projected demand through 2035, said Asish Mohanty, senior analyst for global LNG research at Wood Mackenzie, an international energy research firm. But supplies could be tight until new projects come online in 2018, he said. “There probably is a sweet spot out in 2016-2018,” and U.S. LNG is well positioned to cash in on that need, Mohanty said.
Adding liquefaction capabilities to existing — and underutilized — U.S. import terminals could be done quicker and at less cost than building entirely new terminals, he said. In addition, the U.S. offers easy access to construction labor and multiple gas fields to feed liquefaction plants, Mohanty said.
Timing essential
But timing is essential. Post-2018 it will be harder for U.S. companies to get into the global market as East Africa projects and more capacity from Australia come online, he said. Total’s Broggi specifically named Australia and East Africa projects, such as in Mozambique, as chief competitors for North American LNG.
Canadian projects in the race include several proposed for the British Columbia coast, said Tom Huffaker, a vice president for the Canadian Association of Petroleum Producers.
“Anybody who can get gas off the continent, we’re all for it,” he said, acknowledging that U.S. shale gas is taking away markets in North America from Canadian producers and something needs to be done to relieve the oversupply. “Our share of U.S. demand is dropping every year.”
Huffaker concurred that time is short. “We are very aware that Australia is way ahead of us,” and that Australia could “soak up the market” before North America LNG can get in the game. “We are very, very aware that we need to be in a hurry.”
The problem for Canada, said Bevin Wirzba, a Calgary-based managing director at RBC Capital Markets, is that all of its proposed LNG projects are new developments, putting them at a disadvantage to U.S. import terminals seeking to add liquefaction capability to an existing dock, storage tanks and pipelines.
Total’s Broggi had four words of advice for anyone looking to build an LNG export project: “Find the buyers, always.” He is skeptical that China will buy as much LNG as some predict in the years ahead. Instead, he expects the nation’s utilities will load up on less expensive pipeline gas from Turkmenistan, Myanmar, maybe even Russia.
“China will not be the one to take the highest price,” Broggi said.
What will the price be? LNG prices in Asia were a big topic of conjecture and speculation among presenters at the Houston forum. North American producers want high prices for their gas, or at least higher than they can get at home. They lust over oil-linked prices currently paid by Japanese utilities for LNG deliveries — some spot prices were around $17 to $18 per million Btu in May — but question whether North American LNG deliveries instead will be pegged to the U.S. natural gas benchmark price at Henry Hub, La., which hovered around $2.60 in mid-May.
U.S. natural gas would allow Asian customers to diversify their supply portfolios from oil-linked pricing, said Mark Habib, a director with Standard & Poor’s energy team. Regardless of U.S. projects, an erosion of oil-linked pricing is possible as new projects come into the market worldwide. “The supply response could be quite significant ... and help erode the link to crude.”
Cheniere Energy’s proposed export terminal at Sabine Pass, La., is the only new U.S. project to have regulatory and export approvals in hand. It has gas buyers under contract in 20-year deals linked to Henry Hub prices, meaning LNG could be delivered to Japan at under $9 per million Btu at today’s U.S. gas prices — liquefaction and shipping included in that price. That price would look appealing to buyers in Japan today.
Reaction of competitors is unknown Several speakers said the unknown for North American gas sales is how Australia, Qatar, Russia and other suppliers will react. “How much are they willing to let North America eat into their market before they compete on price,” said Charles Whitmore, senior market analyst at the U.S. Energy Information Administration.
In addition to perhaps lower prices, U.S. exports also offer political stability and more than enough proven reserves to guarantee supplies, said Antonio Bellver, LNG supply manager for Repsol-Gas Natural LNG. The Spanish company has signed a contract to buy gas from Cheniere’s Sabine Pass export terminal. Repsol likes the portfolio diversification with Henry Hub-based pricing.
RBC’s Wirzba believes it will be difficult to get an oil-linked price for western Canadian LNG, though Janine McArdle, senior vice president at Apache Corp., said all of the potential buyers for Apache’s proposed Kitimat, B.C., LNG project are discussing oil-linked prices.
“Oil prices provide buyers a very reliable, transparent” pricing mechanism, she said.
Customers sought for Kitimat Apache and producer partners Encana and EOG Resources are trying to put together customers for a Kitimat liquefaction plant capable of initially handling 700 million cubic feet of gas a day. The terminal and 287-mile pipeline could total $5 billion to $6 billion, plus an additional $9 billion to develop the gas fields.
Having experience with oil prices is important for Japanese utilities, said David Lang, a Hong Kong-based partner specializing in China and energy transactions and projects at law firm Vinson & Elkins. It would be risky for utilities to expose their customers, and their own financial statements, to a different cost basis (Henry Hub) than their competitors are using.
Besides, Lang said, “We can’t be certain where Henry Hub will be in five years, much less 20 years.” Contrary to today’s low prices, Henry Hub topped $10 per million Btu in December 2000, February 2003, fall 2005 and summer 2008.
What may make more sense, Wirzba said, is for Asian LNG buyers to invest in North American gas reserves so that they can partially control their own prices. Several Japanese and Chinese companies have done just that in Canadian and U.S. gas fields.
Wood Mackenzie’s Mohanty sees LNG prices in Asia falling as new Australia projects start up over the next several years, with spot prices in the $10 to $11 range by 2020. Long-term deals inked before then will get higher prices, he said. Though even the traditional oil-linked contract prices will slip a bit, Mohanty said. Instead of a million Btu of LNG selling at near 15 percent of the cost of a barrel of oil, the contract price could slide to 14 percent or even 13 percent, with downward adjustments at high prices.
Export battleground Assuming North America gets into the LNG export business, London-based Keith Bainbridge, of RS Platou, an international ship brokerage, said he hopes it’s not as short-lived as the import business last decade. Terminal operators invested billions of dollars to build and expand import operations, only to look out at empty docks as booming shale gas production eliminated the need to import foreign LNG.
But the shale-led oversupply in North America will have its limits, says Standard & Poor’s, which projects U.S. LNG export projects have maybe five years to get into the business before supply and demand balances out at home, Habib said. “The opportunity window may be limited.”
U.S. gas demand needs to grow by 5 billion cubic feet a day, about 7 percent over this year’s projected demand, to soak up the oversupply, he said.
Wood Mackenzie forecasts 6 bcf a day of U.S. LNG exports by 2022, Mohanty said. That’s maybe one-third the combined volume of LNG export applications submitted to the Energy Department for approval.
The limits on U.S. exports should come from the market, not government, Lang said, a view shared by all of the speakers at the forum.
“It would be political suicide to try to stop it,” said Barry Worthington, executive director of the U.S. Energy Association. The main opponents to exports, he said, are environmentalists that link it to hydraulic fracturing and shale gas production, and large gas customers that want to keep U.S. prices low.
Commenting on the political debate over exports, Bill Cooper, president of the Center for LNG, an industry trade association, said, “You probably have a better chance of winning the lottery than predicting that.”
Environmental opposition to exports will be loud, said David Wochner, a partner in the law firm of Sutherland Asbill & Brennan. “The Sierra Club is leading the charge against LNG exports and they are leading the charge against hydraulic fracturing,” said Wochner, who deals in energy and regulatory issues at the law firm. “They see exports as a hook to get to fracking.”
Shale gas development has received “incredible media attention” and congressional attention, said Michael Baer, director of the Office of Oil and Gas Analysis at the Department of Energy. “Shale development is an industrial process” that requires constant fracking to maintain production, he said, adding that his comments “are my own little musings going around in my head” and not an official position of the department.
Environmental politics aside, Wochner acknowledged not everyone likes exporting U.S. energy to foreign countries. “Local constituencies are increasingly uncomfortable that natural gas produced in their backyards is going to be shipped overseas.”
Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/industry-ponders-how-north-american-lng-will-change-global-markets
| 