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Long View Needed to Understand LNG Outlook, Expert Says

A window of opportunity is closing on exports of liquefied natural gas (LNG) from the United States, an ExxonMobil Corp. executive warned Monday. Meanwhile, margins have shrunk, and the industry is urging speed on export approvals. But an LNG expert told NGI that it's important to have a long-term perspective on prices and exports.

"If we are serious about having a U.S. LNG industry and capturing the tremendous opportunities in front of us then we need to ensure that the case of LNG exports does not become just another casualty of bureaucracy," Rob Franklin, president of ExxonMobil Gas & Power Marketing Co. said during a speech in Washington, DC.

"If policymakers don't revisit and redress some significant legal and regulatory problems…then the U.S. could be left behind during one of the great, historic developments in global energy and trade,”Franklin said in a speech at the Johns Hopkins School of Advanced International Studies.

Last week, trade group America's Natural Gas Alliance (ANGA) called on the U.S. Department of Energy (DOE) to determine that all LNG export proposals to non-free trade agreement countries would be in the public interest. ANGA said there should not be a dual approval process for LNG export projects -- DOE and FERC -- and that the Federal Energy Regulatory Agency project approvals should be enough (see Daily GPIApril 16).

The calls for urgency on LNG come at a time when collapsed global crude oil prices have shrunk LNG margins as the price of most LNG is indexed to crude oil. Moody's Investors Service said early this month that many projects could be canceled because of the shifted environment (see Daily GPIApril 7).

"I think it's important to distinguish the short- to mid-term from the long-term outlook," Berkeley Research Group's Christopher Goncalves told NGI. He leads the firm's LNG, natural gas, and power group.

In the near term, an abundance of liquefaction capacity coming online will create surplus conditions, he said. There will be pressure on LNG prices and pressure on the more expensive LNG projects around the world. The most economic supplies will be favored by the market, Goncalves said.

For North American projects, the ones in an advanced stage of financing and development are the best positioned. "They generally have competitive economics compared to other projects worldwide," Goncalves said. "But there is a question out there as to whether those economics are competitive enough for the global environment. And that's really true of all LNG projects around the world because the prices have become so low that it's hard for very many projects to compete."

But the long-term outlook for prices is different from looking just to the end of the decade. "With a lot of these projects aiming to come online in the time period of 2018 to 2022, around the end of the decade, what really matters to them and their economics is the long-term outlook for prices in the next decade," Goncalves said.

"And that's where I think there are really very substantial and rich questions for the industry to answer because one tends to assume in the energy industry that prices will be sustained at levels that they are currently. We all tend to look at current price signals or recent price history as benchmarks for the outlook. But the only thing that's clearly true about natural gas and LNG prices over the long term is that they change a lot and that they're volatile."

Goncalves said prices from now until about 2018 "don't matter that much" for long-term project economics. What will matter is how contracts are negotiated and signed, as well as the pricing mechanisms and price indices that will be in effect for the next decade and beyond. "That's where the critical questions lie," he said.

Franklin said global LNG demand is expected to triple between 2010 and 2040. " To put this into perspective, it means that the amount of incremental gas needed to meet global demand by 2025 will be almost double the size of the entire U.S. gas market today," he said. "Most of the new demand for LNG will come from existing and emerging markets in the Asia Pacific as well as the Middle East." 

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