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LNG Export: 'Not Huge,' But Not Insignificant

When the fear and hype die down, U.S. exports of liquefied natural gas (LNG) will happen, and volumes will be smaller than many expect with a modest impact on domestic gas markets, according to a global gas market expert. But just a little bit can make a difference in other ways.

Ken Medlock, a Baker Institute energy fellow at Rice University in Houston, said the United States will be "lucky to see more than 1 Bcf/d" of exports 10 years from now. "I don't think it's going to be a huge number," he told NGI.

"Here's the deal, though, and this is what I think is the most important thing from a policy perspective and everything else: when you have that artery open so there's this opportunity, all you you really need is just the threat of arbitrage to begin to see markets blink."

Linking U.S. gas markets with the world will cause Asian and European market players to take gas storage positions in the United States "because what you have when you have both import and export capability in the U.S. is a direct link to all the storage we have in this country," Medlock said. "Once that begins to happen, it creates not only spatial arbitrage opportunities, but intertemporal [opportunities]. So you can trade basically based on seasonal price movements. And that will inject a lot of liquidity into the global market.

"And I think that's going to put tremendous pressure on all these oil-indexed paradigms that you see beginning to crumble in Europe. But particularly in Asia I think you'll begin to see that begin to crumble."

Even if North America becomes a sort of gas storage lung, inhaling and exhaling with the seasons, don't look for long-held global LNG trading practices to crumble soon. That will take at least a decade, Medlock said. "It's not going to happen fast." One of the important things that has to happen in the Asian market is development of a continental pipeline system, particularly in China, Medlock said.

Back home, the storage capacity positions global arbitrage players take won't necessarily be in all the caverns that were mined in recent years with the anticipation of growing LNG imports. Asians and Europeans can hold U.S. storage capacity anywhere in the country and make their market strategies work through displacement, Medlock said.

"If I'm Tepco [Tokyo Electric Power Co.], I can take a storage position at Leidy [Hub] and actually use that seasonal movement to hedge some of the risk that I see associated with seasonal price movements to cargoes I actually receive," he said. "But you still need that physical capability to link to that market, and that's what opening exports up will do."

Geopolitically that has "tremendous implications" because of all of the LNG currently imported into Asia at oil-indexed prices, Medlock said. Middle Eastern countries, in particular, have benefited from the emergence of the Asian gas market. "What this does is it puts pressure on that revenue stream, and it does change the dynamic in terms of how those countries approach various things in the foreign policy arena," Medlock said.

The potential to tweak geopolitics with the export of LNG is largely lost in the debate over whether exports would be good or bad. That's because the most salient issues are what exports would do to the price that residential and business consumers pay for gas at home and what exports would do for job creation and economic development.

As the U.S. Department of Energy weighs whether to allow export of LNG to countries with which the United States does not have a free trade agreement (FTA) (see related story), the "public interest" it must consider relates mainly to the pocketbooks of U.S. citizens, Medlock said. But the fact that homegrown U.S. gas is now a bulwark against imported LNG illustrates that what happens in the United States does influence the world market, Medlock said. LNG cargoes spurned by the United States through displacement readily find a home in Japan, which desperately needs them.

"Those sorts of things are displacement arguments, and I think those...are sort of evidence enough that what's going on here really does have an impact everywhere else in the world. There are definite geopolitical benefits that accrue to the United States as a result of all this stuff. If we begin to export, you could potentially further those sorts of things."

But the downside remains that exports would drive up demand and raise costs, by however much, at home, Medlock said. "When you look at this through the lens of international trade (most people have just been looking at sort of a U.S.-centric lens)...you understand that foreign prices will adjust, too. And as they adjust as a result of these new supplies being introduced to the foreign market, those arbitrage windows that appear so large now are going to collapse and that's going to limit how much gas is ultimately exported."

With applications filed for the export of more than 17 Bcf/d of LNG from the United States, Medlock said the current situation is reminiscent of the days when dozens of regasification and import terminals were on people's minds.

"I think we'll be looking back at that [17 Bcf/d] number the way we look back now at the 47 projects that were filed for regas," he said. "I do see some exports happening, and I think it's all largely going to be by players who have portfolios they could use to arbitrage." Mainly the arbitrage opportunities will be in the Atlantic Basin, trade between Europe and the United States. "It will be interesting. You will see a little bit of trade into the Pacific Basin. I don't think that's going to be the primary route because of distance. I think you'll see displacement."

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