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Barclays: U.S.-UK LNG Price Gap Has Narrowed

Analysts who have been predicting that a wave of liquefied natural gas (LNG) is coming to U.S. shores have more than a little in common by now with "the boy who cried wolf." Still, market watchers at Barclays Capital and elsewhere are saying next year is the year that more global liquefaction capacity will come online and flood the Atlantic Basin with supplies.

"In 2010 the still oversupplied U.S. market will need to stay mindful of the new, virtual trans-Atlantic bridge that is borne of additional Atlantic basin supply," Barclays analysts wrote in a research note last week. "This means that Henry Hub and the UK NBP [United Kingdom National Balancing Point] should continue to dance together more closely, both on a prompt and near-term forward basis."

On a prompt-month basis, the analysts point out, the differential between NBP prices and those at Henry Hub averaged 90 cents/MMBtu year to date, compared with $2.55/MMBtu in 2008.

This hasn't always been the case, the analysts noted. U.S. and UK LNG prices are more closely linked than in the past owing to burgeoning LNG supply and a more developed spot market for cargoes, based in part on more flexible contracts that allow for cargo diversions.

However, NBP prices are not a clear indicator of the landed cost of LNG in Europe, the analysts cautioned. For instance, in August 2008 LNG prices in Spain were about $5/MMBtu higher than those for the UK. "In contrast, estimates for current landed prices for Spain and the UK show that the differential has shrunk to zero," the analysts wrote.

Still, which way the cargoes go has nearly everything to do with price. "If U.S. natural gas prices trade at a discount of over $2 relative to European benchmarks, the U.S. is unlikely to receive LNG cargoes above and beyond firm contracted volumes," the Barclays team projected. Under this scenario, imports are likely to average less than 1 Bcf/d.

However, if U.S. prices trade at minus 40 cents to 40 cents/MMBtu differential to Europe, spot cargoes from Trinidad would likely come to the United States, while West African cargoes would go to Europe, the Barclays analysts wrote. "Under this scenario, U.S. LNG imports could average 1 to 2 Bcf/d."

And if U.S. prices beat those in Europe by more than $1/MMBtu, cargoes from Trinidad, Africa and even the Middle East will make their way to U.S. terminals, the Barclays team predicted. "For example in 2007, when U.S. prices rose to a premium of $3.70/MMBtu relative to UK NBP during the period February through June, LNG imports to the U.S. averaged 2.5 Bcf/d, with the month of April average a record 3.3 Bcf/d and peak daily sendouts over 4 Bcf/d."

Tudor, Pickering, Holt & Co. Securities Inc. noted last week that gas sendout from U.S. LNG terminals was running at 1.1 Bcf/d in November, compared with 0.8 Bcf/d during the year-ago period.

Barclays isn't alone in looking to 2010 for more LNG imports. Recently analysts at Wood Mackenzie predicted that U.S. LNG imports would grow on abundant global supply. This trend grows and then peaks around 2011 and hits a fairly steep decline in 2013, according to Wood Mackenzie. Stronger prices in Europe and incremental demand growth in the Pacific Basin will be what draw the cargoes away from the U.S. again, they said (see NGI, Nov. 23).

"Worries of a flood of LNG imports into the U.S. have simply been postponed to 2010 from 2009," the Barclays analysts wrote.

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